7.21.16 | Certificates of Deposit – Rusty Tweed team
What are Certificates of Deposit?
A certificate of deposit is a time deposit, a financial product sold in the U.S. and overseas by banks, credits unions and thrift institutions. Savers give a bank their cash for a set period of time in exchange for a number of interest payments. CDs are similar to saving accounts as they are insured “money in the bank” and therefore practically risk free.
CDs can let you boost savings, put money aside for a rainy day or for your child’s tuition, or to save up for a down payment on a home.
CD rates vary so you can make more money on your deposit by opening a CD when rates are higher.
What Types of CD Accounts Exist?
Traditional or High Yield CDs
Deposit a fixed amount of money for a specified term and you will receive a predetermined interest rate, typically higher than that found in a savings account. You know what your return will be, but there are penalties for early withdrawal, including loss of interest and possibly even principal. You will be able to cash out at the end of the specified time limit or roll over into another term.
Varied or “bump-up” CDs
A bump-up CD allows you to benefit from a rising rate environment. If halfway through your term, the bank offers an improved rate, you can tell them you want the higher rate for the remainder of the term. The disadvantage to this is that you normally receive a lower initial rate than on a traditional CD. Ensure you have realistic expectations before you go for a bump-up CD.
Liquid or “no-penalty” CDs
This type of CD account allows you to withdraw money before the term limit without a penalty, after at least seven days. However, you will likely have to maintain a minimum balance in the account in order to do so. The interest rate on a liquid CD will be lower than on a traditional CD. However, it will be higher than the bank’s money market rate. This CD allows for maximum flexibility.
There are numerous other Certificates of Deposit accounts. The three above, however, are the most widespread.