What is a CD bank account?
A deposit account certificate is just another deposit product available at banks, alongside savings, Money Marketand verification accounts. But instead of depositing money that you can withdraw at will, or add overtime, CDs are generally a more fixed product that involves a one-time initial deposit and an agreement to keep those funds in the account without withdrawals for a set period. time period or maturity term.
The trade-off of locking your funds is that you are in turn able to lock in the interest rate you will earn. While a savings account rate can change at any time – or with the frequency – that the bank deems appropriate, opening a CD involves the bank making a written promise about the interest rate that it will pay you for the duration of the term.
CDs are usually offered in standard format maturity conditions from 1 month to 10 years, with the most common durations ranging from 6 months to 5 years. But note that a bank can offer a CD in the duration it wishes. In fact, sometimes the highest national rate is for an odd-term certificate — say 5 months or 19 months — which is offered as a limited-time promotion.
Key points to remember
- CDs represent an agreement between you and the bank that, in exchange for depositing a certain amount of funds which you will leave on deposit for a specified period, the bank will pay you an increased interest rate.
- CDs are a good option for savings that are best not invested in the market due to an insufficient investment horizon or the need to ensure that the funds generate a safe and reliable return that preserve capital.
- The highest paying CDs in the country pay 3-5 times the national average, so it’s important to shop around to maximize your return.
- Your CD funds are also safe at any FDIC-insured bank, whether the bank is physical, internet-only, or a hybrid of the two.
- Although maximizing your CD earnings involves keeping the certificate until maturity, all banks offer an early withdrawal option, specifying in advance what their penalty policy will be if you need to withdraw prematurely.
How much do CDs cost?
CDs generally offer a rate premium over more liquid savings and money market accounts. In other words, in exchange for your commitment to keep the funds in place, the bank will pay you more than it pays savings account holders.
Banks also typically pay a higher rate for longer commitments, as it means they can have that money in place for a longer period of time. So, on average, 5-year CDs pay a higher rate than 1-year CDs.
A higher initial deposit can also sometimes generate a more lucrative return, as with Giant CDs requiring $50,000, $100,000 or even $250,000. But many banks don’t offer jumbo tiers, and even when they do, the incremental rate improvement is often quite small.
The FDIC calculates a weekly national average for various CD terms at over 4,000 FDIC banks. This average is extremely low, but luckily it’s easy to earn many times more than that by simply doing your homework in search of the best current rates.
Why do shorter CDs sometimes pay more than longer ones?
The longer you have agreed to keep your CD funds in the account untouched, the more profitable it is for the bank. That’s why, in theory, banks are willing to pay you more for longer commitments than for short ones.
However, many other factors come into play regarding a particular bank’s deposit strategy. They need to consider what they expect to happen to national rates in the months and years ahead, as well as how much deposit assets they need to fund the lending side of their business, and how much balances of certificates they already have. for different deadlines.
Therefore, it is not uncommon for a bank to offer a higher rate on one or more shorter terms in its menu. All of this means that it uses the most competitive rates to attract consumers to certain terms that it deems most advantageous for its current deposit portfolio.
Are online banking CDs safe?
Traditional banks have offered CDs for decades. But the banking environment has changed with the advent of the internet. Online banks now dot the banking landscape, as do the Internet divisions of physical institutions.
The good news for CD buyers is that it does not matter what type of bank is offering the CD, as long as you check that it is FDIC insured. Indeed, online banks are approved, regulated and insured in the same way as physical banks. So whether you deposit $25,000 on a CD at a local branch of a bank in your community or at a bank that operates solely online without any branches, your money is also protected.
It’s especially fortunate when you learn that online banks are often among the most profitable CD banks. Given their lack of physical branches to operate, staff, and maintain, internet banks operate with low overhead and are therefore usually able to pay higher rates to their customers.
What if I need my money sooner?
While it’s true that locking your funds to a CD is the reason you can get a higher return than with other savings accounts, it’s not impossible to withdraw your money sooner if you you need. Of course, there are financial consequences, but the option is available if the need arises.
Each bank is required to have an establishment early withdrawal penalty policy, and as a potential CD depositor, you have the right to be informed of the policy before committing to a CD. This will also be specified in the official information that will be provided to you when opening a CD account.
The most common method of calculation used by banks to determine the amount of the penalty you will incur is the deduction of a number of months of interest from your balance at the time of the early withdrawal, the number of months of interest often increasing penalty for longer CDs. .
For example, Bank XYZ may deduct 3 months interest if you cash in a CD a year earlier. But if your certificate has a term of 5 years, the early withdrawal penalty may be 12 months or more of interest.
Each bank can set its own policy and penalties vary widely. While some are light, others are quite expensive, with some policies potentially even reducing your director. For this reason, it is extremely important to investigate the early withdrawal penalty policy for any bank CD you are considering. Even if you don’t anticipate needing to cash in early, it’s best to avoid any policy that can eat away at the principal, and when comparing two otherwise similar certificates, choose the one with the lighter penalty – just in case.
How to Open a Bank CD
Opening a certificate of deposit generally follows the same steps as opening any new bank account, and will involve more or fewer steps whether you are a new bank customer or an established customer.
You will first need to complete an application. This is usually done online, but can be done in-branch if you open the certificate at a bank that operates in your community. Some banks also allow paper applications to be sent by US mail.
If you are not already a bank customer, you will need to prove your identity with a photo ID. And you will be presented with various written account terms and disclosures that you will need to sign.
Just like with a savings account or a checking account, you have several options for making your initial deposit, either when opening the account or a little later. Most banks offer transfers from another account at that bank, an external transfer from another bank, or a check mailed or submitted via mobile deposit.
Remember that unlike a savings or checking account, your initial CD deposit is a one-time transaction. You cannot make a small deposit to open the account and then a large deposit to top up the certificate balance later. Each dollar you wish to commit to the CD generally must be deposited in a single initial deposit.
As soon as you’ve completed the account opening process, it’s a good idea to put a reminder on your calendar a month or two before the CD is due, so you can think ahead about what you want to do with the money when it becomes available. , and can watch your mail for advice from your bank on how to forward your CD maturity instructions.
If you’re not looking to tie up your money for a while and want easier access to it, you might consider opening a high-yield savings account as an alternative. Below are some savings account options from our partners that may be competitive with the rates you can earn on CDs. It should be noted that unlike a CD, where your rate is locked in, with a savings account the bank or credit union can change your rate at any time.
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