Best Certificate of Deposit Accounts
Certificates of deposit (CDs) are a safe way to earn interest on your savings. But there is a catch. Your money won’t be as accessible as with a regular savings account. The good news is that they offer higher returns than you would get with a traditional savings account or checking account.
But how do CDs work? And when should you use them? Here’s everything you need to know about certificates of deposit.
Common Questions
What is a certificate of deposit (CD)?
Certificates of deposit, or CDs, are a type of federally insured savings account. They have fixed interest rates and set maturity dates. CDs typically have better interest rates than traditional savings accounts. And they don’t have monthly fees.
How do certificates of deposit work?
When you open a CD account, you’re lending your money to a bank in exchange for a guaranteed return. This is one way banks build up the funds that they need to make loans and turn a profit.
The investor deposits money in an account where it must stay for an agreed period to earn the promised interest. Typically, the longer the period, the higher the interest. In general, CDs provide a higher rate of interest than you could get from a standard savings account. However, you must agree to lock in (not withdraw) the money you invest for a set period.
Each CD has an established maturity date or term length. When you purchase a CD, you can choose the term length that best suits your financial needs — often six months, one year, or three years. Most CDs mature within five years, but you can find CDs with term lengths up to 20 years.
Many CDs come with a minimum deposit requirement, which can be $500–$1,000 or $10,000+ depending on the bank and type of CD.
Because the bank uses your locked-in deposit to make long-term investments, most CDs charge an early withdrawal penalty. This discourages you from using the funds before your CD matures.
CD accounts Vs. Savings accounts
A savings account can provide similar interes rates to CD but allow you to access your money at any time without penalty. True. CD rates are typically higher than savings account rates, but you cannot withdraw your funds from a CD without paying a penalty until the term is up. A savings account is more flexible and liquid, while a CD offers the potential for higher returns but with less access to your money.
Do I need to worry about any other fees with CDs?
In addition to early withdrawal penalties, some CDs come with other fees, as well. For instance, with a brokered CD, you may have to pay a flat fee or a percentage of the amount you are investing. If that’s the case, you’ll want to ensure the interest rate makes it worthwhile before locking in your money. Don’t open a CD account until you fully understand the potential fees associated with it.