This year, certificates of deposit are in the spotlight. Even for 1-year terms, the best CD rates offer a higher than 4% annual percentage return. This is a world away from what they were a few months ago.
“If the market turmoil experienced by investors over the past month has had any silver lining, it is that savers have the opportunity to invest in safe instruments such as CDs at better rates,” Elisabeth Mesquit (certified financial planner) said in an email.
CDs are known for their safety, so higher rates might make it more appealing to people who want to open bank accounts. Let’s take a closer look at their features.
Definition CDs: The time deposit account
A certificate of deposit can be used to protect your savings account. A CD, also known as a “time deposit”, is a type of CD that you open. The bank must set a time period for the CD to be held. You will earn higher interest rates than other bank accounts while still enjoying the same protections such as federal deposit insurance.
A bank, credit union or non-profit equivalent can open a CD. Credit unions call CDs “share certificates”. There are also CDs that can be bought and sold by investment firms, which are known as “broked CDs”, but we will concentrate on regular CDs, with the five numbers we have.
1. Interest rate
The interest rate is what determines how much you can earn from the CD funds. Most CDs are fixed rate, unlike regular savings. The return on CDs is predictable and guaranteed as long as you do not withdraw too early. (Learn more about that later. )
Online credit unions and banks tend to have the highest CD rates. Some one-year rates can exceed 4%. This compares to the national average of 0.833% APY on five-year CDs according to Federal Deposit Insurance Corp.
This current rate environment has been fueled by the Federal Reserve’s actions. Banks take the Fed’s lead when it raises its benchmark interest rate, which it did multiple times in 2022 to curb inflation.
2. CD term
The term of a CD is the time that the account has been open. The most common range for CD terms is between three and five years. However, you can also find CD terms as short or long as one month.
The CD rate will rise if the CD term is longer. There are some benefits to leaving your money untapped for longer periods of time, but also downsides. Withdrawing early from CDs with a longer term can result in steeper penalties.
3. Early withdrawal penalty
The CD’s early withdrawal penalty is usually a one-time fee. It’s only charged if you cash out prior to the end of the term. The penalty is the interest earned by a CD over days or months. It could be three months or more of interest depending on the term. You will lose any interest that you have not earned if you withdraw early. It’s quite common for banks to refuse partial withdrawals. This makes it an all or nothing transaction.
One exception to penalties is no-penalty CD. This CD allows you to withdraw your money at no cost after the first few days. However, no-penalty CDs do have limitations. They have lower rates and terms than other CDs.
4. Opening minimum deposit
The bank will determine the minimum amount that you can open a new CD. NerdWallet’s analysis of 30 financial institutions that offer competitive CD yields revealed that the average minimum is $1,000. However, you can also find CDs with minimums as low as $100,000 (often called jumbo or bare minimums). You only have one chance to add funds to a CD with your opening deposit, so make sure it counts.
5. Date of Maturity
The maturity date is the day on which a CD’s expiration date occurs. This date is important because CDs have a short window in which to withdraw your money for free. A bank can renew your CD automatically for the same term as you originally selected if you do not make any payments. If it were a 5-year CD, you would have to wait five more years before you can withdraw without penalty.
When weighing all CD factors consider the rate and whether or not a CD will help you save money.
Mesquit stated that CDs’ “attractiveness” as an investment or saving vehicle is dependent on the rates they offer compared to inflation.