What's a Certificate Deposit?

What's a Certificate Deposit?

If you've ever visited a bank, you've probably heard about the option to open a certificate of deposit or CD. But, do you know what it is? Check this guide and learn more about these types of accounts.

Have you ever heard about a certificate of deposit (also known as CD)? This is a type of savings account banks offer, in which you can save a fixed amount of money for a fixed period.

After the period agreed, the bank will pay interest on the amount in your account. This is why they are considered low-risk accounts with moderate returns.

Read this guide and learn more about the Certificate of Deposit!

  1. What's the difference with a savings account

Unlike a savings account, you aren't allowed to freely transfer your money in and out of a CD. This is mainly the difference between these two accounts.

With a CD you are required to leave a certain amount of money in the account for a certain period of time. If you want to withdraw before time, you will probably face a penalty.

  1. Benefits

Once you've decided you won't be needing the money for a certain period of time and go for a CD, you should know that there aren't many downsides to open your account. The more amount of money you deposit in the account and the longer you agree to keep it there, the higher the rate of interest you will receive.

The rates are higher than standard savings accounts and offer an average annual percentage yield of around 0.76%. The interest increases for every additional year you keep your money untouched.

  1. Risks

Every bank offers a different interest rate and type of CD. So, when you are making your research you should pay attention to whether the rate is fixed or variable. If it's the latter, this means that the interest rate may drop as time passes. Check also the payment terms! This can be monthly or annually.

  1. Jumbo CD

This CD is ideal for large investors or businesses. They usually need a minimum deposit of $100,000 and grant low-risk investments. Interest rates also increase significantly and the terms can be as low as a few days.

  1. Withdrawal penalty

Unlike what it happens with other accounts, with CDs you will face penalties if you want to withdraw money from the CD. However, there are Low / No Early Withdrawal Penalty accounts that, as long as you keep a minimum amount of money in the account, you will be allowed to make withdrawals without reduced rates or penalties.

  1. IRA CD

There are some financial institutions that offer a CD with the tax advantages of an IRA. This is an ideal account for those who are concerned about fluctuating investments. They usually require a low initial investment and are more flexible. Bear in mind that these accounts offer lower average return rates.

  1. Not only at banks

Banks and financial institutions aren't the only ones offering a CD account. You can also get it from brokerage firms or independent salespeople. Make sure you make enough research before making your deposit! This way you will ensure that the broker is trustworthy.

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