Jordan Schneir
By: jordan_shneir
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What is CD in Banking? – Learn if a Certificate of Deposit Is a Good Option to Keep Your Savings

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For most people, a checking and savings account is enough to cover their banking needs, but you should know that there are other options when it comes to storing your money. One such option is a Certificate of Deposit o CD.

CDs are a type of federally insured savings account that can offer a number of great benefits over traditional savings accounts. However, that doesn’t mean they’re the right choice for everyone.

Let’s take a look at what a CD is, where to find one, and whether or not a Certificate of Deposit is right for you.

What Is a CD?

As I mentioned above, a Certificate of Deposit is a type of federally insured savings account. These accounts have fixed interest rates (often higher than savings accounts) and a maturity date, which is the date at which you can withdraw your funds.

CDs are meant to be a low-risk way to securely store your money while earning interest over time. While CDs can grow your savings faster than a savings account, they are less flexible as you will not be able to access your money for a certain amount of time.

Generally speaking, CDs are considered a much safer investment than stocks and bonds, though they do offer a lower (but guaranteed) return.

How Does a Certificate of Deposit Work?

So how do CDs work?

When you open a CD, you agree to deposit your money into a bank for a fixed amount of time. While your money is in the bank, the bank pays a fixed interest rate which is usually higher than you would find with a standard savings account.

Once the term is up, you can withdraw the money you originally deposited in addition to any interest you earned while the bank held your money.

If there is an emergency and you need to withdraw your money from your CD, you can do so but may be subject to an early withdrawal penalty.

How is a CD Different From a Savings Account?

Certificates of Deposit are similar to savings accounts in that both options offer a way for you to securely store your money for an extended period of time.

However, CDs and savings accounts differ greatly when it comes to withdrawing flexibility and term lengths.

Savings accounts, of course, are not completely liquid — they only allow you to make up to six withdrawals/transfers per month. Still, that is much more flexible than CDs, which only allow you to withdraw your money after the term is up without paying a penalty.

The other major difference comes in regards to term lengths. Savings accounts do not have terms. They remain open until you or your bank closes them. CDs can last from months to years, depending on what you choose.

Ultimately, though, savings accounts and CDs serve very similar purposes. Both options are great for storing and growing your savings. However, as they typically generate larger returns, CDs may be a better option if you don’t expect to need to access your savings in the near future.

Benefits of a CD

Why should you consider opening a CD?

Certificates of deposit offer a number of great benefits, including:

  • Safety: A lot of people avoid investing in stocks and bonds due to risk. If this is you, CDs are a safer, FDIC-insured alternative to more volatile investments.
  • High-Interest Rates: Certificates of Deposit are particularly notable for their high-interest rates. CDs generally offer higher rates than found with savings accounts.
  • Flexible Terms: While you may not have much flexibility in terms of accessing your funds, you do have flexibility regarding the length of your term.
  • Low Fees: CDs often have low or no fees associated with them. While they do have early withdrawal penalties, you often won’t have to worry about maintenance fees eating into your returns.

If you’re looking for a secure place to store your money while earning interest, a CD might be the way to go.

Types of CDs

More often than not, CDs offer both fixed terms and fixed interest rates. However, depending on the institution, you might have access to a few specialty CDs.

Specialty CDs include:

  • No-Penalty CD: These CDs allow you to withdraw your money early without penalty.
  • Step-Up CD: These CDs offer APYs that increase on a regular basis.
  • Brokered CD: Brokered CDs are CDs offered by a third party, like a brokerage firm.
  • High-Yield CD: High-Yield CDs offer higher rates than typical CDs.
  • Jumbo CD: Jumbo CDs generally offer higher rates but require high minimum balances ($100,000+).
  • IRA CD: An IRA CD is a standard CD that is held in an individual retirement account (IRA).
  • Bump-Up CD: Bump-Up CDs allow you to request higher interest rates as your bank increases its APYs. Typically, you’re only able to request one or two rate increases.

Best CDs in the Market

Interested in opening an online Certificate of Deposit?

Fortunately, nearly every banking institution offers CDs. Unfortunately, this can make it pretty difficult to choose the best one.

To help make your decision a little bit easier, here are five of the best CDs available:

Marcus by Goldman Sachs Discover Citizens Access Ally Alliant Credit Union
Minimum Deposit:

 

$500

Minimum Deposit:

 

$2,500

Minimum Deposit:

 

$5,000

Minimum Deposit:

 

$0

Minimum Deposit:

 

$1,000

1-yr APY:

 

2.15%

1-yr APY:

 

2.00%

1-yr APY:

 

2.10%

1-yr APY:

 

2.00%

1-yr APY:

 

1.90%

3-yr APY:

 

2.10%

3-yr APY:

 

2.05%

3-yr APY:

 

2.15%

3-yr APY:

 

1.95%

3-yr APY:

 

1.95%

5-yr APY:

 

2.25%

5-yr APY:

 

2.10%

5-yr APY:

 

2.25%

5-yr APY:

 

2.15%

5-yr APY:

 

2.05%

Is a CD Right For You?

The first question you should ask yourself when choosing between a savings account and a CD is, “Will I need to access this money in the near future?

If the answer is yes, then a CD might not be for you. CDs work best for those who have the financial flexibility to put away money for months or years at a time. You also have to consider whether or not you can meet your bank’s minimum balance for CDs. 

Since CDs do often have higher interest rates than savings accounts, they can be a better option for those that can afford to tuck their money away for a while.

If, on the other hand, you can’t commit to putting away your money for a long time without touching it, it might be better to stick with a standard savings account. A savings account will give you much more flexibility when it comes to withdrawing and transferring your money.

#CaminoTip
When considering if a CD is the right option for you, simply ask yourself if you’ll need to access the money in the near future. If the answer is “yes”, a CD may not be the best choice.

Final Thoughts

Certificates of Deposit are a mystery to a lot of people. However, they can be extremely beneficial under the right circumstances.

If you’re looking for a secure investment, a safe way to store your money, a guaranteed return, and can afford to put your money away for a little while, a CD can be a great way to grow your savings.

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