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How Do CDs Work? Start Stacking Your Savings

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A certificate of deposit, or CD, is a type of savings account. When you open a CD, you agree to leave money in the account for a specific period of time. Over that time span, the money earns interest, which you can withdraw at the end of the term.

Why Choose CDs?

CDs are considered one of the safest forms of investment. They are FDIC-insured up to $250,000, as long as the bank that issues them has FDIC insurance. Other key features of CDs include:

Depending on which financial institution you bank with, your bank or credit union’s CD products also might be referred to as:

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How a CD Earns Interest

CD accounts earn compounding interest. That means interest is added to the principal, and you earn interest on the original amount you deposited plus all the interest the account earns during the CD term.

Terms of a Certificate Deposit

The terms of a CD detail important information about the account. This includes the following features that are locked in:

Types of CDs

There are some important distinctions between the different types of CD accounts. Understanding these differences can help you choose the one that’s best for you.

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Related: America First Credit Union Review: Competitive Rates and Top Customer Service

Why Would You Use a Certificate of Deposit?

People use CDs to help them meet a variety of financial goals. They include:

CDs can be a part of anyone’s financial plans. They’re a great option for people who:

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Is a Certificate of Deposit Worth It?

CDs are considered one of the safest forms of investment. They offer important benefits, such as:

The national average APY for a 12-month standard CD is 0.15%. That might not seem like much, especially if you compare the rate to returns you might expect from other investments. But CDs serve a purpose in financial planning.

Do CDs Affect Your Credit Score?

Assets such as savings accounts and certificates of deposit don’t directly affect your credit score. Your credit score is based on the following factors:

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Some banks check your credit when you open a new account. This can affect your credit score because it is a new inquiry. Fortunately, inquiries make up only 10% of your credit score, so a hard pull should drop your score by just a few points.

How To Open a Certificate of Deposit

Opening a certificate of deposit is similar to opening a checking or savings account. Here’s how it’s done:

Step-By-Step Guide

  1. Choose a bank or credit union that offers certificates of deposit. You might qualify for relationship rates if you have a checking or savings account at the same institution.
  2. Choose the type of CD you want. Compare the terms of the CD and interest rate.
  3. Complete the application for opening a certificate of deposit. Many banks let you complete and submit this online.
  4. Fund the account. You may be able to transfer money online or send a check.

What To Consider Before You Open a CD

Before opening a certificate of deposit, think about how it fits in with your financial goals. It’s a good place to keep money that you don’t need to access immediately since CDs typically earn more interest than savings accounts.

But pay attention to the term length. You may pay fees for cashing in the CD early. The interest rate might not keep up with the inflation rate. You can lose some purchasing power if you leave money too long in a CD with an interest rate lower than inflation.