A certificate of deposit is one of the most popular types of savings accounts due to its fixed interest rate and security in an FDIC-backed bank. As long as you can afford to lock up a certain amount of money into a set amount of time, you should be able to earn a bit of money back through interest. Depending on the bank, a fixed term CD can be anywhere from 3-months to 5-years.
The fixed date of the withdrawal is the “maturity date.” The good thing about CDs is that they usually don’t involve any opening or maintenance fees (especially if you go through an online bank); however, they often have early withdrawal penalties. This penalty is the reason why you must only put in an amount of money that you know you will NOT NEED until the agreed-upon maturity date.
While the rates of CDs may go up or down depending on the bank and state of the economy, that fixed term CD rate you are promised when you first sign up remains the same, giving them an advantage over regular savings accounts. The credit union version of a Certificate of Deposit is a Share Certificate. It is also low-risk and insured through the NCUA.
Opening up a CD account or Shared Certificate account starts similarly to other bank accounts. You can either apply in person or online at an internet bank. It’s recommended these days to use online banks because they typically offer higher APY%s. One of the biggest differences between a savings or checking account and a CD is that you might not be able to make contributions over time to the latter. You put in that fixed term CD deposit initially and then allow that amount to sit there until the date of maturity.
Fixed Term CD Should Be Used With Caution
When does it make sense to open a Certificate of Deposit? As mentioned above, it makes sense if you have money set aside for a major purchase and want to set it aside in a safe place where it can earn interest. In addition, it’s a better option for designated savings than a regular savings account, which is only ideal for emergency funds or long-term building.
When you open a Certificate of Deposit, don’t put all of your savings in there. You’ll still want to keep some set-aside either in a regular savings account or elsewhere for an emergency fund.
How do you know which bank or credit union to choose? First, look over APY %s of online banks such as CIT Bank. It offers promising benefits with its fixed term CD offers. There is even a “no-penalty 11-month CD”, which gives you the security of a CD account without being denied or penalized for accessing your funds.