What Is a Certificate of Deposit?

You may have heard the term "CD" mentioned as an investment and savings tool. A "CD" is a certificate of deposit, which is a type of product offered by banks and credit unions that is very much like a savings account. It's "money in the bank," but it's not money you can touch until the maturity date of the certificate.

Like a savings account, a CD is insured by the FDIC and usually has a fixed interest rate, which makes the certificate of deposit one of the least risky investments out there. However, unlike a savings account, a CD is a type of time deposit, which means that it has a specific, fixed term. When you put money in a CD, you do so with the expectation that it will be held there for the entire term. There are generally stiff penalties for early withdrawal from a CD account.

You can buy a certificate of deposit for various terms. Some typical CD terms would be a three month, six month, one year, or five year CD. The longer term CDs generally offer the best CD rates, and CDs almost always carry a better interest rate than savings accounts from which money can be withdrawn at will. Fixed rates CDs are the most common, which protects your certificate of deposit from the fluctuations of the stock market. However, some banks offer CDs with a "bump-up" feature, which will allow for a single readjustment of the CDs interest rate during the term of the CD, if interest rates go higher while the owner of the CD is in the middle of their term. Other times, CDs are tied to an index such as the stock market.

A minimum deposit is typically required for a CD, and some banks may offer the best CD rates on larger deposits. "Jumbo CDs," with a minimum deposit of $95,000 to $100,000, usually offer the best certificate of deposit rates. However, some institutions will offer lower rates on the Jumbo CDs and off a high yield certificate of deposit with a smaller deposit requirement. Check with your financial institution to see what types of certificate of deposits they offer. Some institutions require a minimum deposit, and may offer higher rates for larger deposits. Sometimes the best CD rates will be offered by a credit union or a savings and loan. Also, be aware of the limitations of FDIC insurance. The government only insures bank deposits up to $100,000.