Investing in Certificate of Deposit Accounts

Certificates of Deposit (CDs) are liquid no-risk investments that can be easily cashed in at any time. A Certificate of Deposit is an account is a time deposit account with a bank, a thrift or credit union. Investors generally receive a higher rate of interest on a CD account than they would on a savings account or money market account.

Don't expect much of a return investing in CD accounts these days or any other type of deposit account since CD rates, savings rates and money market rates are all extremely low right now. Right now the best 12 month CD rates at banks are just above 1.00%. CIT Bank CD rates right now are the highest CD rates around on 1 year CDs. CIT Bank's current 1 year CD rates are at 1.07% with an APY of 1.08%. The minimum opening deposit is $25,000.

CDs are also federally insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. Share CD accounts which are CD accounts offered by credit unions are also insured up to $250,000 by the National Credit Union Administration (NCUA).

Investing in a CD account is easy. You invest a fixed some of money for a fixed period of time. The time, or CD term, can be short as 1 day or as long as 10 years. Most banks and credit unions offer CD terms ranging between 6 months and 5 years.

Usually, the longer the CD maturity date, the better the CD rates are unless the rate curve is inverted where short term CD rates are higher than longer term CD rates. This usually happens when inflation is high and the Fed raises interest rates on short term financial products to slow the economy down and bring inflation down.

For lending your money to the bank, credit union or any other financial institution, your account earns interest at regular periods. Interest is usually credited to the account monthly. The more frequently interest is credited to the account, the higher the account yield will be due to compound interest.

In the beginning of this post I mentioned being able to cash in your money at any time when investing in a CD account. You will have to pay a price for this. The price paid is known as an "early withdrawal penalty." The penalty is usually some or all of the interest earned on the account depending on the CD term. Before investing in a timed deposit like a CD account, make sure you don’t need access to the money invested during the term. Some CD accounts are callable which means the bank may choose to terminate the CD account at any time. And the bank won’t pay you a penalty for closing the account early.

Here are a few tips when purchasing Certificates of Deposit

  • Make sure you know what the maturity date is and get it in writing
  • Find out if the CD can be called by the bank, credit union or financial institution
  • Find out if the CD interest rate is fixed or a variable rate
  • Ask how often the bank pays interest
  • Find out if there are any penalties or if you forfeit interest for an early withdrawal
  • Shop around for the best CD rates

Taking the time and doing research can save you help you make more money on your CD investment. You can search and compare CD rates from many banks and credit unions by using our CD rate tables.

Author: Brian McKay
March 19th, 2012