What Is a CD (Certificate of Deposit)?

May 24, 2023 By Susan Kelly

A certificate of deposit is a specific kind of savings account with a set interest rate typically greater than the rate offered by a standard savings account. This product has a predetermined term duration and a fixed withdrawal date, often known as the maturity date. A certificate of deposit (CD) allows you to invest money for a period that is normally between three months and five years. CDs do not incur monthly fees; the vast majority have an early withdrawal penalty. Also, find out about what is a CD account.

Certificates of deposit, much like conventional savings accounts, are insured, meaning that you will receive your money back in the very unusual event that your bank goes bankrupt. The Federal Deposit Insurance Corp. will protect your money if you buy certificates of deposit (CDs) at a bank. CDs are share certificates at credit unions, which are not-for-profit organizations comparable to banks. The National Credit Union Administration provides insurance coverage for the certificates held inside credit unions.

What does CD stand for?

The term "certificate of deposit" (CD) refers to a document that, in the past, was physically printed on paper and served as evidence that one's money was being kept in a bank at a certain interest rate. Your savings are stored and federally insured up to a maximum of $250,000 per account at banks and credit unions, even if certificates of deposit (CDs) often do not come in paper form anymore. Find out more about the nature of a deposit.

How does a CD work?

The first step in creating a certificate of deposit account is the same as the first step in opening any other bank account: You may submit your application electronically or in person at a banking institution. The most significant distinction is that after making your first deposit into a CD, you will usually never be allowed to make any more deposits. You cannot make contributions over time as you would be able to with a conventional checking or savings account.

The interest generated on a certificate of deposit is typically compounded and deposited to the account regularly, daily, or monthly. You get the whole amount after the CD's term. (You also can request that the bank send you periodic interest payments if they are willing to do so.)

When the term of a certificate of deposit (CD) ends, a bank will normally offer to renew it at a new rate, which is likely comparable to the rate offered by new CDs with the same or a comparable duration. It's possible that doing this would not be in your best interest, given that it's recommended that you shop for the best CD prices whenever you start a new CD.

What CD term should I get?

This is dependent on the objectives you have set for your money. When deciding between short-term and long-term certificates of deposit (CDs), you need to balance the available rates and the time you are willing to invest. Generally speaking, the interest rate on a certificate of deposit (CD) will be greater if the term is longer, which means you commit money to the CD for longer.

When to choose a CD

You are concerned about safeguarding the funds you have set up. A certificate of deposit is a fantastic option if you already have money put aside for a significant future purchase, such as a vehicle or a down payment. This kind of investment allows you to keep your money secure and out of reach while allowing it to collect interest.

You desire rewards while minimizing risk as much as possible. Suppose you want to protect your money from the uncertainty of the stock market while still earning a return that is often higher than that of other savings accounts. In that case, putting your money into certificates of deposit (CDs) may make sense. According to the FDIC, the national average interest rate for a standard savings account is 0.40%, much lower than the average interest rate for a five-year CD, which is a 1.37% annual percentage return.

Are CDs worth it?

Concentrate on the factors that led you to desire a CD. Do you have a large quantity of money set up that you can put toward a major purchase in the next several years? Or, have you set aside any of your money with the intention of investing in the future? CDs provide a secure location to store a quantity of money.

You shouldn't make your selection based only on the rates currently offered, but it is good to know how rates are moving. For example, when the Federal Reserve increases its rate, banks and credit unions often react by boosting the rates they provide on certificates of deposit (CDs).

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