A certificate of deposit, or “CD,” is a type of financial product usually offered by banks and credit unions to consumers who are looking for a secure investment. Like a savings account, this type of deposit is insured by the FDIC and is virtually risk-free.
A certificate of deposit works like any other investment, however, it is “purchased” for a fixed time period, which could be anywhere from six months to five years. During that time, you can’t touch the money in the CD until the end of the term, or the maturity date. However, that money is earning a predetermined rate of interest, which will be paid out to you at the maturity date, along with the money.
CDs typically require a minimum deposit, and larger deposits generally offer higher interest rates. When you open a CD, you might get a passbook or a paper certificate, but these days it’s more common to just get a book entry and an item denoted in your periodic bank statements, rather than an actual “certificate of deposit.”
When the CD earns interest, the interest is paid out periodically, and depending on what you choose, it can be mailed to you periodically as a check or transferred to a savings or checking account. You can determine which of these options offers the best interest rate for you.
Withdrawing your funds from the CD before its maturity date is called “early withdrawal” and generally incurs some substantial penalties. This is to discourage the CD holder from withdrawing the funds early.
When the CD is reaching its maturity date, the institution usually mails a notice to the holder requesting directions as to whether the holder wants to withdraw the principal or “roll it over” (which means depositing it into a new CD). There is generally a “window” of time after the maturity date in which the holder will be able to cash in the CD without penalty. If the holder provides no instructions, the CD will “roll over” automatically, unless you have left specific instruction at the time the CD was opened that it should not be rolled over.
