CD Accounts Defined | Pros and Cons
A certificate of deposit, commonly abeviated as CD, is a term based savings account in which you deposit your money into a specific bank for an agreed upon length of time. The longer you invest your funds into a CD account, the higher the yield or percent APY return on your money the bank will provide you with at the end of the end of the set period of time. The pros and cons of a cd are simple and yet complex. The biggest pro of a cd is that you can get a higher rate the longer you can lock your money away. The biggest con of a cd is that if you can't deposit your money long term and need to withdraw early, you can lose some of the interest you earned.
Length of CD's
Some CD accounts last only for one month and other CD accounts for 10 years. It is crucial that you understand that many banks lock in the rates of the Certificates of Deposit accounts which can be good and bad. For example, if you invested a large sum of money into a 5 year CD account before the recession you could of locked in a rate as high as 5.5% APY and kept that rate all through the recession. However, if you were to lock into a 5 year CD account now, at a rate of 2.9%, the rate would not go up even if national CD rates went up. Below are the most common lengths for certificates of deposits:
- 1 Month CD
- 2 Months CD
- 3 Months CD
- 6 Months CD
- 9 Months CD
- 12 Months CD
- 18 Months CD
- 24 Months CD
- 30 Months CD
- 3 Years CD
- 4 Years CD
- 5 Years CD
- 7 Years CD
- 10 Years CD
Flexible Rate Certificates of Deposit
Some banks provide a flexible rate, where you lock in a rate and then you have one chance to adjust the rate if national Certificates of Deposit rates go up. One example of such a CD account is Ally's 2 Year CD. Other banks have a time frame that if the rate goes up within 10 days of opening an account, they will up the rate for that account to keep the customer happy.
CDs Lock After First Deposit
When you lock in rates with CD accounts, it means that you will no longer be able to add more funds to that account. In some banks, there is a window of a few days in which you can deposit or withdraw money within that time frame. Should you close the account or withdraw money from the CD account once that window of opportunity has passed, you will be penalized. Be sure to read the fine print on what the fees or penalties will be. In some cases, if you withdraw funds from a Certificate of Deposit you could lose a month or more of interest and/or be charged a specific percentage in fees.
CD Accounts are FDIC Insured
CD accounts in the USA are backed by the FDIC. This means that even if the economy tanks your bank, you will be reimbursed by the FDIC. This is the beauty of insurance. Make sure your cds are insured by the fdic.
Certificate of Deposit Accounts - Safe Keeping with Interest
In general, the more principal you invest into a certificate of deposit the higher the rate the bank will give you. Be sure to look at jumbo CD accounts as they will usually reward you for putting in a large sum of money. Some banks will provide a higher rate conditioned upon the length of the account, the amount of principal in the account, or both. Over all, certificate of deposit accounts are one of the highest interest earning online bank account. Be sure to read reviews about banks and the cds that you are researching.