Certificates of Deposit (CD’s)

Certificates of Deposit (CD’s) are written on funds that are deposited with a bank or credit union specifically for the purpose of earning interest on the money that is deposited. Because the FDIC or the NCUA insures most CD’s, they are similar to savings accounts but the similarity stops there. Unlike savings accounts, CD’s have a fixed interest rate as well as a pre-determined fixed term, usually three months, six months, one year, or five years. The money deposited into a CD will be held until it reaches maturity (the end of the pre-determined term). Upon maturity, the amount originally deposited plus any interest accrued may be withdrawn.

CD’s usually require a minimum deposit and because financial institutions know they will have that money a set period of time, they will frequently offer a higher interest rate than they would on a normal savings account. The reason being that a withdrawal can be made from a savings account at any time, regardless of how long the money has been in that account. There are circumstances where financial institutions may offer a variable interest rate on a CD. The interest rate on a CD depends on the amount of the principal, the term of the CD, whether the CD is a personal CD or a business CD, and even the size of the issuing financial institution.

When a CD is due to mature, most financial institutions will give you the option of either closing the CD or rolling the funds into a new CD. They may allow you to specify that you do not want it rolled over when you first open your CD. You are usually given a specified amount of time to withdraw your funds without penalty. If you try to withdraw those funds after that time period has expired, you will be charged a penalty fee, just as you would if you were to withdraw your funds before maturity. If nothing is done with the matured CD within a certain time frame, most institutions will automatically roll your funds into a new CD.

CD’s are a great way to earn money while you save it. However, before purchasing a Certificate of Deposit, check with your financial institution. There are several different types of CD’s available, each having different rules and regulations attached to them. Your financial institution will be able to help you determine which type of CD best meets your needs.

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