What is a Certificate of Deposit?

Do you own a savings account at your bank? Do you have money set aside for the future safely tucked away in an account but need to earn more interest? If so, let’s talk about Certificates of Deposit (CDs).

Certificates of Deposit have better returns than savings deposits

Certificates of Deposit (CDs) are a type of savings account with higher interest rates than traditional savings accounts. Investing in CDs provides greater returns than saving deposits. CDs typically have terms ranging from six months to five years, determining the length of time your money remains locked in at a fixed interest rate. Furthermore, higher rates can be earned if you choose longer term deposits, and the penalties incurred for withdrawals before maturity are generally relatively minor.

Certificates of Deposits are low-risk

One of the attractive things about certificates of deposit is that they are low-risk for both the bank and the customer. They are federally insured and backed by the U.S. government for up to $250,000 per depositor, per FCIC-insured bank, per ownership category.

Like with all investments, there are benefits and risks. For example, if inflation grows faster than the money you have in the CD, your real returns could be lower.

There are penalties for early withdrawal

When you open a Certificate of Deposit account with your bank, you should keep in mind that you will typically incur a penalty if you make an early withdrawal. That’s because the bank agrees to pay you a fixed interest rate for keeping your funds locked in this type of deposit for the entire duration of the contract period.

The penalty amount may vary from bank to bank and is often expressed as a percentage of the amount withdrawn early. The maturity date should be clearly stated in your contract.

Ask us about Certificates of Deposits – Member FDIC

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