A certificate of deposit – also referred to as a “CD” – is a special type of savings account. It provides a fixed income for a specific amount of time. You may purchase a CD at a credit union, a bank, or an online banking institution. The certificate of deposit provides a higher interest rate than a standard savings account, in most instances. You are required to keep the money that you place in it on deposit for a designated amount of time. Typically, this is a period of three to five years. Continue reading to learn how to shop for and open a certificate of deposit.
What is a Certificate of Deposit?
A certificate of deposit is what is referred to as a “time deposit account”. Upon opening, you fund the account with a beginning deposit. Then, that money earns interest for a certain amount of time.
This specified time is referred to as the “maturity period”. This time period may be as little as 30 days or as long as 10 years.
What Happens Once a Certificate of Deposit Matures?
When a certificate of deposit matures, one of two things will happen.
First, you may withdraw the initial deposit that you placed in the account as well as the interest earned.
Second, you may choose to roll the initial deposit and the interest that it accrued into a brand-new certificate of deposit.
CDs offer much higher interest rates than standard savings accounts and even money market accounts.
Can You Withdraw Money at Any Time from a CD?
Your ability to withdraw money early from a CD will depend upon the terms of your account.
It must be understood, though, that federal law has established a minimum penalty or fee on early withdrawals. There is no maximum penalty currently in place.
The only exception to paying an early withdrawal penalty is the no-penalty certificate of deposit. This is also known as a “Liquid CD”. The funds in this deposit account are accessible at all times.
The next option you have to avoid penalties on early withdrawal with a certificate of deposit is simply to place your money into a high-yield savings account.
Choosing the Type and the Term of Your CD
When electing to purchase a certificate of deposit, you must choose the type that you want and the term associated with that type. You may choose from a standard CD or a liquid CD.
The first results in fees when you withdraw funds and the second does not.
You will also need to determine how long you want the CD for. The longer the money is left in the account, the more interest you will earn.
You must also determine if you want a single account or if you want to add another person to a joint account.
Choosing a Provider
Once you know the type of certificate of deposit account that you want, the term of said account, and whether it will be just in your name or if you are adding another name to the account, it is time to choose the provider. The most common location to sign up is a credit union or a bank.
- Make sure that the account is covered by the FDIC, the NCUA, or both.
- Be certain to shop around a bit. You want to get the account that pays the best interest rate.
- You may choose an account with low penalties or no penalties on early withdrawals.
How Do You Receive Interest on a Certificate of Deposit?
When signing up for a certificate of deposit, you must determine how you will want to receive the interest that you earn.
You may collect it at the end of the term of the CD. You may also elect to receive interest payments in periodic-based disbursements. In most instances, you may choose to receive it monthly or yearly.
To maximize the earnings from a CD, it’s best to receive interest payments all at once, at the end of the term.
If you want to have a regular flow of cash from your investment, you should make arrangements for periodic disbursements.
What are the Differences Between a Savings Account and a CD?
Both the savings account and the CD allow an investor to save money for certain financial goals and both offer a return that is guaranteed. The savings account allows you to make an initial investment as well as additional deposits. Furthermore, you may engage in up to six withdrawals each month.
The CD requires a starting deposit that is held for a certain amount of time (maturity period). This time frame varies.
Additionally, CDs are designed to pay much higher interest rates than savings accounts and the money cannot be withdrawn as easily.
Caution with CDs That Have an Exceptionally High Rate
There is a scam among companies that are not federally insured that lures customers with an exceptionally high interest rate. This is done so that they may – eventually – encourage the customer to buy something else in the future.
You should avoid this.
It is advised that you practice caution when purchasing a certificate of deposit to avoid any scams that may result in the loss of your money. If you have any questions, contact us here at Somerville Bank for answers.
Is a Certificate of Deposit Right for Me?
A certificate of deposit with a good term is an excellent method for earning some interest on cash while keeping it tucked away safely. If you are the type of investor who does not like to risk your money, it is best to choose a CD. These are an excellent means of taking a chance on investing and earning extra cash without experiencing the repercussions of volatile investing tactics, such as stocks.
What Are the Basic Features of a Bank-Bought CD?
Many features may accompany a CD that is purchased from the bank. These include the following:
- No-Penalty CDs – This means you may withdraw money from a CD without paying a fee.
- Bump-Rate CDs – This means once the maturity term of the CD is met, you may choose to increase or bump up the rate.
- Step-Up CD – This CD means that the interest rate of the account has the possibility of increasing over the term of the account.
- Add-On CDs – This type of account will allow you to make extra deposits once the initial deposit is made and the account is open.
- Jumbo CD – This indicates that the initial deposit must be larger than that of a regular CD, but also that the interest rates are higher.
- High-Yield CD – This type of CD pays higher interest rates to the account holder.
Contact Us Today
We here at Somerville Bank offer certificate of deposit accounts to our clients. If you have an interest in signing up for this type of account or have questions about these types of accounts, we encourage you to contact us today. You may call us or you may stop by one of our many locations. One of our financial advisors will be assigned to you and will work with you to get you the answers and/or type of account that you need.
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