Certificates of Deposit
Certificates of deposit (CDs) represent a secure savings vehicle paying fixed interest rates higher than regular savings accounts. CDs lock money for set durations from banks in exchange for guaranteed returns unaffected by market volatility. Understanding how CDs work and strategizing maturity terms and financial institution options helps consumers earn attractive hassle-free interest.
How CDs Work
Opening a CD means depositing funds with a bank for an agreed period of time, typically ranging from 3 months to 5 years. The bank pays guaranteed interest at a higher rate than regular savings in exchange for you leaving the money untouched during that CD’s term.
Interest accrues based on the CD’s opening balance, rate and term. You collect all interest earned at maturity. Early withdrawals penalize a portion of earned interest, so CDs reward maintaining deposits until the end of terms.
CDs provide principal protection and predictable returns ideal for conservative savers wary of market risks. The FDIC insures CD balances up to $250,000.
Benefits of CDs
Key advantages CDs offer include:
- Guaranteed fixed interest rates unaffected by market fluctuations
- Typically pay higher interest than regular savings accounts
- Federally insured by FDIC up to $250,000 per depositor
- Simplicity avoiding the need to actively manage investments
- No risk of losing principal like with bonds and stocks
- Wide availability from banks and credit unions nationally
- Flexible terms ranging from 3 months to 5 years
Drawbacks of CDs
Consider a few CD tradeoffs:
- Require locking up money for set durations to avoid early withdrawal penalties
- Interest rates usually don’t keep pace with inflation long-term
- Surrendering liquidity unlike savings accounts allowing withdrawals anytime
- Limited FDIC insurance coverage over investing through securities accounts
Evaluate your liquidity needs and risk tolerance to determine if CD tradeoffs warrant the interest guarantees provided.
How Interest Rates Work on CDs
CDs pay fixed interest for the duration of their term based on opening deposit amounts:
- Interest compounds using the account’s annual percentage yield (APY)
- Rates remain unchanged over the full term unlike variable rate products
- Interest accrues daily based on CD balances
- All interest earned is payable at maturity rather than monthly or annually
Locking higher rates for terms as long as 5 years fixes returns and provides planning certainty.
Typical CD Terms
Standard CD terms available include:
- 3 months
- 6 months
- 9 months
- 1 year
- 18 months
- 2 years
- 3 years
- 5 years
Compare interest rates across different CD terms. Longer 5-year CDs pay the highest rates but require the longest commitment. Select terms fitting your timeframe and liquidity needs.
Steps to Open a CD
Follow these primary steps when opening a new CD:
- Shop and compare interest rates from banks and credit unions.
- Select a CD term fitting your timeline. Longer equals higher rates.
- Deposit opening principal up to maximum FDIC coverage.
- Begin accrual period and maturity date.
- Automatic renewal may apply unless indicated otherwise.
Opening a CD is fast and simple if you align the CD term with your savings strategy.
Early Withdrawal Penalties
The tradeoff for CD higher interest is keeping money deposited for the full term. Withdrawing any funds before maturity incurs a penalty reducing earned interest.
Typical early withdrawal penalties equal:
- 3 months interest on 1 year CDs
- 6 months interest on 2-5 year CDs
- Deposit amount x (APY-current APY) for partial withdrawals
Avoid early withdrawals to maximize earned returns over regular savings rates.
##Closing a CD at Maturity
As maturity approaches, decide whether to:
- Cash out the CD proceeds and principal by transferring it to your linked bank account
- Renew the CD automatically per the original agreement
- Reinvest the CD for another term at current rates
- Move the matured funds into a different CD or savings product
Make proactive choices aligning with new plans for those funds rather than leaving on auto-renewal paths.
CD Laddering Strategies
CD laddering strategies diversify across maturity dates for ideal flexibility:
- Open multiple CDs with sequential maturity dates
- For example, open a 1-year, 2-year, and 3-year CD simultaneously
- As each CD matures, reinvest for a new longest term CD
- Ensures access to some funds annually without penalties
- Keeps assets earning higher ongoing CD rates
Laddering provides both liquidity and high return stability.
Compare Top National CD Rates
Banks with notably competitive CD rates include:
- Synchrony Bank
- Marcus by Goldman Sachs
- Ally Bank
- CIT Bank
- American Express National Bank
- Sallie Mae Bank -CIT Bank
Check online rate listings to find top yields and calculate potential earnings on CD options.
Check Local Bank CD Options
Don’t overlook local banks and credit unions when CD shopping:
- Community banks fund local needs with deposit dollars
- Credit union CDs may offer special member rates
- No need to open full relationships just to access CD products
- Often less mobile app visibility but personal customer service
Compare hometown CD options against purely online bank alternatives.
Consider Brokerage CDs
Brokerages like Fidelity, Schwab, and Vanguard also offer CDs providing FDIC insurance plus convenience managing alongside investment accounts:
- Access to both financial institution and brokerage CD inventory
- One statement covering both CDs and investment accounts
- Link CD maturities to fund trades or cash needs in linked accounts
- Availability of CD laddering and other CD investment strategies
Just ensure rates match best-in-class options without unnecessary middleman fees.
Finding the right CD terms from competitive institutions provides guaranteed returns in a low risk manner. Let time work for you, not against you. With smart CD strategies like laddering aligned to your timeline, earning safe returns through CDs creates financial certainty and peace of mind.