|
A certificate of deposit is a timed deposit where you place your money into an account for a set period of time. There are many different financial institutions that offer certificates of deposit. Institutions include banks, credit unions and brokerage firms. Each offers a slightly different type of CD account than the other which we will explain in more detail later. Certificate of deposit accounts are similar to money market accounts and savings account with a few different exceptions. Besides being a term deposit CD accounts usually also have a fixed interest rate which is unlike savings accounts and money market accounts. Deposit terms on CD accounts can range anywhere from 1 month to 5 years or more. Bank CD accounts are also insured by the Federal Deposit Insurance Corporation (FDIC) and credit union CD rates are insured by the National Credit Union Administration (NCUA).
When you deposit your money into a CD the financial institution that has your money pays you an interest rate. How much you receive for your money depends on several different factors.
The prevailing interest rates, the inflation rate, what the competition's CD rates are and the term of the CD are all factors that determine what the interest rate will be on your deposit. The CD term is the biggest factor that dictates what the rate will be in a range. Prevailing interest rates and the inflation rate are the other big factors that determine what the CD rate will be. Usually the higher interest rates are earned on longer CD terms. There are times when this isn't the case like when you have in invested yield curve. When the yield curve is inverted shorter term rates are higher than longer term rates because short term inflation is higher than long term inflation. One other factor that will get you a higher rate is the deposit amount of the account. Jumbo CD rates are higher than regular CD rates. Jumbo CD rates are paid on account balances of $100,000 or more. Most CD accounts have a fixed rate but some accounts have a rate that can change when prevailing interest rates change. This type of account is referred too as a variable rate account. Banks offer traditional certificates of deposit and credit unions offer share certificates. Both types of account are similar but just referred to differently. Brokerage CD accounts are different because brokerage houses buy large CD accounts from financial institutions, break them up and sell them to investors. When you buy a brokerage CD you earn an interest rate for the entire term. If you decide you want your funds sooner than when the term ends you have to sell the CD in the open market. You might not be able to sell it for what you paid for it. This will cause you to lose some of your principal. With a credit union or bank CD account you can have access to your money sooner and you just pay an early withdrawal penalty, usually the penalty is some of the interest you earned on the account but your principal is safe.
Find the best CD rates from banks and credit unions.
|
