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If you’re seeking higher interest rates than your traditional bank account can provide — and you don’t need access to your cash for a while — you might want to consider a certificate of deposit (CD).
But how does a certificate of deposit work, anyway? Read on.
What Is a CD?
A certificate of deposit is a 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.
Once the CD term is up, you receive the money you originally deposited back plus the interest earned.
CDs usually earn higher interest rates than a traditional savings account or money market account because you’re required to leave funds in a CD for a fixed period or else face an early withdrawal penalty.
You can buy CDs from a bank or credit union.
Bank CDs are insured by the Federal Deposit Insurance Corp. (FDIC) up to $250,000 — just like savings accounts and money market accounts.
Bank with a credit unionAsk your branch about 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.
So long as your CD balance doesn’t exceed $250,000, you won’t lose money if the insured bank or credit union goes bankrupt or shuts down. This makes CDs a low-risk investment option.
How Do CDs Work?
A CD lets you earn a fixed interest rate on deposited funds with a specified withdrawal date.
To get started, you’ll fund a CD account with a lump-sum deposit. This money is called the principal.
You’ll earn a fixed interest rate on your principal for the term of the CD.
Most CD terms last from six months to five years. In some cases, you can find CDs with terms as short as a few days or as long as a decade.
Generally, the longer the CD term, the higher the interest rate.
Some banks require a minimum deposit to open a CD. These…
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