There are a variety of certificate of deposit accounts available, including one of the less-common types known as a “callable CD”
What is a callable CD? This unique type of CD may offer a higher interest rate than traditional CDs, though there is more risk for the account holder and less than the bank. Before opening a callable CD, make sure you fully understand how it works.
What Is a Callable CD?
A callable CD is a certificate of deposit account that the bank can choose to end before the CD reaches maturity. This gives the bank the opportunity to terminate the account if CD rates fall drastically — essentially “calling” it back.
When a bank calls a CD, it will return principal deposits to account holders, plus the interest earned up to that point. If your bank calls your CD, you do not lose any money, but you do lose out on potential future interest earned at that rate.
There will be a set amount of time before the bank is able to call the CD, should it choose to do so. It is important to carefully review the conditions surrounding call terms when opening an account.
Benefits of a Callable CD
What Are the Risks of a Callable Certificate of Deposit?
The biggest risk of a callable certificate of deposit is that you can lose the source of income or the money you would earn in interest suddenly. When you use a callable CD as an investment, you may be counting on the monthly interest payments to cover some of your bills. When the bank calls the CD, you can lose the income, and you will likely earn less each month in interest.
Why Are Callable CD Rates Higher?
Callable CD rates are higher because you are assuming most of the risk for the CD. Usually, when a bank offers a CD rate you are locking in the CD rate for the length of the CD term. If the interest rates drops, you can maintain your earnings, but you are stuck if the interest rates go up. With a callable CD, the bank can close the CD and protect themselves when interest rates drop. However, if the interest rates go up, you are locked in at the lower rate.
When Should I Choose a Non Callable CD?
A non callable CD may be a good option if you think that interest rates are going to drop during the term of your CD. However if you feel that interest rates are not likely to drop, you may want to choose a callable CD so that you can earn a higher interest rate for the term of the CD. When you choose a callable CD, you should be sure that you can deal with the lowered amount of income that you could face when the CD is called. If you need to earn that amount for the life of the CD, then a non callable CD is a better option.