How Does a Certificate of Deposit Work (CDs)?
March 14, 2024
Have you been looking for a low-risk way to save money that earns more than a traditional savings account? Certificate of Deposit (CD) accounts are a popular choice for savers looking to earn interest while keeping their money safe.
But what are they, how do CDs work, and are they safe? Moreover, is there more than one type of CD? And how much can you earn in interest? Here’s everything you need to know about how CDs work.
What is a Certificate of Deposit?
A CD is a savings product offered by banks and credit unions. It often provides higher interest rates than regular savings accounts. With a CD, you keep a specific amount of money in the account for a predetermined period. The predetermined period that money stays in a CD is called the term.
CDs are available in various terms, ranging from a few months to several years. The longer the term of the CD, the more you will typically receive at the end. However, you may not be able to access your money during the term of the CD without incurring penalties.
Because of the early withdrawal penalties, CDs aren’t the best fit for items like emergency funds. And, since their terms are short, they are not ideal for long-term goals like retirement. However, CDs can be great for short-term savings needs like events, vacations, or down payments.
CDs can be a good option if you want a low-risk, predictable account to grow your savings over a set period. However, it's vital to consider the terms and conditions of the CD carefully. Look at the annual percentage yield (APY), term length, and potential penalties before you choose
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How Do CDs Work, Rates/Interest?
When you open a CD, you deposit a lump sum of money into the account. The interest rate on the CD is typically fixed for the entire term.
The earnings is called interest. Interest is usually paid or credited into the account monthly, quarterly, semi-annually, or annually. When you get paid is based on your CD's conditions.
When the CD matures, you get your initial deposit plus all the interest you've earned.
Some key benefits of CDs are that:
- CDs offer a fixed rate for the entire term. This provides stability and predictability in your returns.
- Compared to regular savings accounts, CDs generally offer higher interest rates. This allows you to grow your savings more efficiently.
- CDs come with various term lengths. This allows you to choose an account that aligns with your financial goals and risk tolerance.
While this is generally a safe arrangement, withdrawing a CD before maturity can result in early withdrawal penalties. So, it's important to commit to the term before you deposit money into a CD account.
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Are CDs Safe?
Because they are FDIC-insured, CDs are considered low-risk. This means that even if the bank or credit union fails, your money will be protected.
CDs are backed by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions. With CDs, your deposits and credited interest are protected up to the insured limit.
The FDIC insures accounts up to $250,000 per account ownership category[1]. Likewise, the NCUA insures up to $250,000 per account holder[2].
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Different Types of CDs & How They Work
When saving in a CD, understand that not all CDs are created equal. Banks and credit unions offer various types of CDs, each with its own set of features and benefits. Let’s get to know the different types of CDs available.
We’ll explore a range of options from traditional term CDs to climbing rate and birthday CDs.
When you understand these variations, you can choose the type that best aligns with your financial goals. Let's dive into the details of each type to see how do cds work and which one might be right for you.
Term CDs
Term CDs are the most straightforward type of certificate of deposit, where you deposit funds for a fixed period, usually ranging from three months to five years. During this time, your money earns interest at a predetermined rate. You cannot withdraw your funds without penalty until the CD matures.
Term CDs offer predictable returns and are suitable for those looking to save for short to medium-term goals.
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Option CDs
Option CDs provide more flexibility than traditional CDs by allowing you to adjust the earning rate or withdraw funds penalty-free before the CD matures. This option gives you greater control over your savings.
Option CDs can be beneficial if you expect changes in rates or may need access to your funds.
Climbing Rate CDs
Climbing Rate CDs or Interval CDs offer a gradually increasing interest rate over the CD term. This allows you to benefit from rising rates. These CDs typically start with a lower interest rate that increases at regular intervals, providing the potential for higher returns over time.
Climbing Rate CDs are suitable if you want long-term growth and protection against inflation.
Guaranteed Growth CDs
Guaranteed Growth CDs ensure a fixed rate of return over the CD term. This offers an added layer of stability and predictability. With this type of CD, you know exactly how much interest you will earn throughout the term.
Guaranteed Growth CDs are a great option for those who prioritize safety over returns.
Birthday Certificate of Deposit
Birthday CDs offer a unique feature that allows you to make additional deposits on the CD's anniversary date. This feature provides opportunities for more savings. It also allows you to take advantage of any extra funds you may have throughout the CD term.
Birthday CDs offer added flexibility. They can help you boost your savings over time while still enjoying the security of a traditional CD.
Start Saving Money for Your Future with Certificates of deposit at Centier Bank
CDs are powerful tools for secure savings and financial growth. By understanding how CDs work and exploring the diverse options, you can harness their potential to achieve your financial goals.
Whether you want a traditional term CD or something more outside the box, being informed will help you make the best decision. Your journey to financial success begins here.
To unlock a world of possibilities, explore Centier Bank's CD options and start saving today. Take control of your financial future and start saving with confidence.
Sources:
[1] https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/
[2] https://ncua.gov/newsroom/press-release/2020/deposits-are-safe-federally-insured-credit-unions
