What Is a Certificate of Deposit CD ?
What Is a Certificate of Deposit CD Skip to content
First, the bank sends you a notification that your CD’s maturity date is nearing. You’ll usually get the message a few weeks to a month in advance. When you get notified, you should start thinking about what you want to do with the account. Once the maturity date arrives, you’ll have the chance to make changes to the account. Banks will give you a grace period, usually a week or two. During the grace period, you can withdraw some or all of the money in the CD, add money to the CD, or make other adjustments without paying an early withdrawal penalty. If you withdraw all the money in the CD, the bank closes it, and you’ll need to open a new CD account if you want one in the future. After the grace period ends, most banks will automatically roll your CD’s balance into a new CD with the same term as the original. For example, if you had a one-year CD, the bank will put the money into a new one-year CD. That means that if you don’t make changes, such as choosing a different term for your new CD, or withdrawing your money during the grace period, you’ll wind up with a new CD with the same term automatically. If you want to withdraw money after the grace period ends, you’ll have to pay the early withdrawal fee.
What do you want to do br with money
Popular Searches
Learn more about your money
Make Money
You need it. Learn how to make it. ExploreManage Money
You've got it. Learn what to do with it. ExploreSave Money
You have it. Make sure you have some later too. ExploreSpend Money
You're spending it. Get the most for it. ExploreBorrow Money
You're borrowing it. Do it wisely. ExploreProtect Money
You don't want to lose it. Learn how to keep it safe. ExploreInvest Money
You're saving it. Now put it to work for your future. ExploreCategories
About us
Find us
Close menuWhat do you want to do br with money
Popular Searches
Learn more about your money
Make Money
You need it. Learn how to make it. ExploreManage Money
You've got it. Learn what to do with it. ExploreSave Money
You have it. Make sure you have some later too. ExploreSpend Money
You're spending it. Get the most for it. ExploreBorrow Money
You're borrowing it. Do it wisely. ExploreProtect Money
You don't want to lose it. Learn how to keep it safe. ExploreInvest Money
You're saving it. Now put it to work for your future. ExploreCategories
About us
Find us
Close menu Advertiser Disclosure Advertiser Disclosure: The credit card and banking offers that appear on this site are from credit card companies and banks from which MoneyCrashers.com receives compensation. This compensation may impact how and where products appear on this site, including, for example, the order in which they appear on category pages. MoneyCrashers.com does not include all banks, credit card companies or all available credit card offers, although best efforts are made to include a comprehensive list of offers regardless of compensation. Advertiser partners include American Express, Chase, U.S. Bank, and Barclaycard, among others. Manage Money BankingWhat Is a Certificate of Deposit CD
By TJ Porter Date September 20, 2022FEATURED PROMOTION
Certificates of deposit (CDs) offer savers a way to earn a higher interest rate on your savings in exchange for agreeing to lock up your money for a fixed period of time — while still keeping your funds safe thanks to the magic of FDIC insurance. That makes CDs fantastic for saving when you have a specific goal and timeline to save for. For example, a CD can be a good choice if you know you want to set money aside for a vacation that you’ll go on in six months. But CDs have downsides too. Before you decide whether a CD is the right savings tool for you, learn about the basics of how CDs work and how they compare to other options.What Is a Certificate of Deposit CD
A certificate of deposit is a special type of savings account that holds a sum of cash for a set period of time. The bank holding the funds pays interest on the balance of the account. Once the CD’s term ends, the CD matures and the holder of the account receives the amount they placed in the account, plus accrued interest. If the CD holder takes money out of the CD before it matures, they typically have to pay a penalty. In general, CDs offer higher interest rates than savings accounts to compensate for the restrictions they place on the account holder’s access to the money. Like other bank accounts, they are protected by the Federal Deposit Insurance Corporation, making them a safe option for people who want to save money.How CDs Work
When you want to open a CD, you go to your bank or credit union. Most financial institutions let you open CD accounts online. A few are more old-fashioned and require in-person opening. You choose how much you want to deposit and how long you want to keep the money in the account. Then, you make the deposit and wait. Once your chosen period elapses, you get your deposit back, plus interest. There are four important factors to consider when looking at CDs.Initial Deposit
Many banks have a minimum initial deposit requirement, such as $100, $500, or $1,000. You need to make sure that you have enough money to open the account. Assuming you have enough to reach the minimum deposit, you’ll have to decide exactly how much you wish to place in the account. The more you put in, the more interest you’ll earn. However, remember that your access to your deposit will be limited during the life of the CD.Maturity Date
When you open a CD, you’ll also select a term of maturity date for the account. Once the maturity date arrives, the bank will return the money to you, plus interest. The length of time between opening the account and the maturity date is called the term. The longer the term of a CD, the higher its interest rate tends to be. Given that CDs are mostly appealing because of their higher interest rates compared to savings accounts, this makes longer terms tempting to savers. However, the early withdrawal penalties charged for taking money from a CD before it matures typically increase as you choose longer CD terms. Also, keep in mind that most CDs have a fixed interest rate. If you choose a maturity date that is far into the future, you’ll be locked into that interest rate. That can be a good thing if market rates fall, or a bad thing if rates rise. Those market rates can change based on many factors, including how the Federal Reserve adjusts its benchmark rate for interbank loans, known as the Federal Funds rate. In general, rates fall during economic slowdowns and recessions. They tend to rise when the economy is hot or inflation spikes.Interest Rates
Banks will advertise the interest rates, often as annual percentage yields (APYs) that they offer on CDs. The higher the interest CD’s rate, the more interest you’ll earn. When you shop around to find the best bank to work with for your CD, consider the CD rates offered by each financial institution. You’ll generally want to find the one that offers the highest interest rates.Early Withdrawal Penalties
A CD account offers higher interest rates than savings accounts because you promise to keep your money in the account for a set period of time. In exchange for giving up liquidity, banks compensate you with larger interest payments. In most cases, if you take money out of a CD before it matures, the bank will charge a penalty. The fee is usually equivalent to the amount of interest you’d earn over a number of days or months. For example, an early withdrawal penalty might be equal to six months’ interest. While opening a CD when you might need quick access to the cash isn’t a great idea, it is still important to look at the penalty that the bank charges, just in case your situation changes.Types of CDs
The basic concept of a CD is simple: deposit money, wait, and receive interest. But some banks offer more complicated types of CDs that add additional features. Traditional CDs. These are basic CDs that work as described above. They usually have terms ranging from a year to five years.Short-Term CDs. These are also basic CDs, but usually have very short terms, ranging from a month to a year.Brokered CDs. Instead of getting these CDs from a bank, you can get these CDs from brokerage companies. They may have higher levels of risk than a bank CD, but compensate with more interest.Jumbo CDs. These CDs require significantly higher minimum deposits than most. Often, the minimum deposit can be $100,000 or more. However, they may also come with higher interest rates.Callable CDs. Your CD’s paperwork might note that your bank or financial institution can choose to close your CD early once a specific “callable date” arrives. If the bank does call your CD, it closes the account and pays you the full term’s interest.No-Penalty CDs. These CDs have no early withdrawal penalty, meaning you don’t have to worry about the fixed term that is the main drawback of opening a CD. However, a no-penalty CD will usually have a lower rate and shorter term than a new CD of another type.Step-Up CDs. A step-up CD gives the account holder the option to increase or step-up the rate on the account at specific intervals or a set number of times. This reduces the risk of opening a CD with a fixed rate only for market rates to increase. However, they usually start with lower interest rates and are not particularly common.What Happens When a CD Matures
When a CD matures, you get an opportunity to withdraw your money from the account, deposit more money, or make other changes. The process varies slightly depending on the bank you’re working with but should follow a similar pattern no matter where your money is held.First, the bank sends you a notification that your CD’s maturity date is nearing. You’ll usually get the message a few weeks to a month in advance. When you get notified, you should start thinking about what you want to do with the account. Once the maturity date arrives, you’ll have the chance to make changes to the account. Banks will give you a grace period, usually a week or two. During the grace period, you can withdraw some or all of the money in the CD, add money to the CD, or make other adjustments without paying an early withdrawal penalty. If you withdraw all the money in the CD, the bank closes it, and you’ll need to open a new CD account if you want one in the future. After the grace period ends, most banks will automatically roll your CD’s balance into a new CD with the same term as the original. For example, if you had a one-year CD, the bank will put the money into a new one-year CD. That means that if you don’t make changes, such as choosing a different term for your new CD, or withdrawing your money during the grace period, you’ll wind up with a new CD with the same term automatically. If you want to withdraw money after the grace period ends, you’ll have to pay the early withdrawal fee.