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A certificate of deposit — CD for short — is a low-risk savings account that holds a fixed amount of money for a certain time, such as six months, one year or five years.
During that time, your deposit earns a fixed interest rate. Usually, the longer the term, the higher the interest rate.
When the CD term is up, you receive your initial deposit back plus the interest earned.
Unlike a savings account, CDs typically don’t let you withdraw money whenever you want. CD accounts require you to leave funds untouched for a fixed period or else face an early withdrawal penalty.
These penalties usually range from three months of interest to one year worth of interest, depending on the term length.
You can buy a certificate of deposit from a bank or credit union. Bank CD accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 — just like savings accounts and money market accounts.
Credit unions issue share certificates, which are the credit union equivalent of CDs. These are also insured for up to $250,000, but by the National Credit Union Administration (NCUA) instead of the FDIC.
CD vs. Savings Account: Which Is Better?
If you’re debating between a certificate of deposit or a savings account, ask yourself this question: Do you care more about interest rates or access to your money?
A CD account usually earns a higher annual percentage yield (APY) than what you usually find in a high-yield savings account — but your money is harder to access.
If you need easier access to your funds, a savings account is a better option.
But a traditional savings account doesn’t earn much interest. In fact, the national APY for savings accounts is just 0.07%.
So if you’re saving for a short-term goal and want to earn as much interest as possible, a certificate of deposit is likely a better choice than a savings account.
Opening a CD makes sense when you are free of credit card debt and already have an emergency fund…
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