If you have a bank savings account, you’ve probably noticed that the interest rate on the account has been steadily decreasing. Do you want to make sure that your rate won’t get cut by the bank anymore? Lock-in an interest rate with a Certificate of Deposit.
The CD (short for Certificate of Deposit) is a bank product that gives savers a fixed rate of return for a specific period of time. That means no surprise rate cuts. The rate you get the day you deposit your funds will be the rate you earn for the entire term of the CD.
During the term of the CD, you can’t access your principal (the amount you deposited) without incurring a penalty, but you get rewarded for the lack of access with a bigger interest rate than on a savings accounts.
How long the CD term runs is up to you. You can choose a term as short as three months or as long as ten years. In many cases, the longer the term of the CD, the higher the interest rate you get – but this isn’t always the case. A bank may need a quick infusion of deposits and may offer a special high rate on a short term CD.
When the CD matures, banks will give you a grace period to close the CD account and withdraw your money.
During the grace period, you can choose not to close the CD and even add money to the account. In this case, at the end of the grace period, the bank will “roll over” your CD for the same time period as before, but at the then current rate which could be lower or higher then the original rate. It’s like opening a new CD without having to re-apply.
Besides the “regular” CD described above, you may encounter some other types of CD accounts. The concept is the same, but there may be a few extra perks. For instance, you may come across a “Penalty-free Withdrawal CD.” This CD will allow a depositor to withdraw funds a certain amount of times before the CD matures without penalty. The obvious benefit to this CD is that if you need some of the money before the CD matures, you’ll get fee-free access to it. The downside is that usually the rate on this type of CD will be lower than on a regular CD with a comparable term to maturity date.
Where can you get a CD? Certificates of Deposit are offered at most local banks and credit unions. But don’t neglect to check the rates at online banks. Many online banks (also called Internet banks) can offer higher CD rates because they have lower overhead expenses than a local brick-and-mortar bank.
Visit eMoneyCentral.com to get daily updates on the highest CD rates available at online banks.