A certificate of deposit is an interest-bearing security that requires you to deposit money at a bank for a certain period of time, such as six or 12 months. CDs are popular among investors because they are low-risk investments that often pay higher rates of interest than savings accounts.
The amount of money you’ll earn on a CD depends on a number of factors. Read on to find out what those factors are and before you tie up your savings, take a look at how to maximize the return on your CD.
Factors That Affect CD Rates
Typically, the longer you keep your money on deposit, the higher the rate you can earn on your CD. For example, one-year CD rates at Citibank are currently 0.15% APY, but if you can extend your maturity for five years you’ll earn 0.50% APY on your money, instead.
Because the financial services industry is a competitive space, it pays off to shop around. And don’t be afraid to extend your search to online banks — they have lower overhead than brick-and-mortar institutions and often share those savings with customers in the form of higher rates.
In addition, an online bank CD account carries the same FDIC insurance as a traditional bank CD. Synchrony Bank, for example, currently offers 1.40% APY on a one-year CD and 2.35% APY on a five-year CD, which is far above the rate you’ll get at Citibank.
Remember that CDs require you to leave your funds on deposit for the entire term. Early withdrawal from a CD can result in a significant financial penalty, such as the loss of an entire year’s interest if the CD has a term longer than four years.
Learn More: Certificate of Deposit (CD) Guide
How to Earn Higher CD Rates
A CD ladder is one way that you can boost the overall interest rate of your CDs. To build a CD ladder, buy multiple CDs coming due at different intervals. When your shortest-term CD pays off, reinvest that money at the long end of the ladder.
For example, if you have a five-year CD ladder with one CD maturing every year, whenever a CD comes due you would buy a new five-year CD to retain the original structure. A CD ladder can increase your earnings by with higher yields that come from longer maturities and you can also avoid penalties by having periodic access to your money if you need it.
Related: Find Higher CD Interest Rates Now
Another way to earn higher CD rates is to look for promotional rates. Some banks will offer higher rates for a short time to earn your business — just be aware that these rates can drop quickly.
You can also look at credit union CD rates because these locally owned and operated financial institutions sometimes offer higher rates than traditional banks. Note that credit union CDs are insured by the National Credit Union Administration for the same amounts the FDIC insures bank accounts.
Related: 6 Tips for Choosing a CD Account
CD APR Rate vs. CD APY Rate
Some banks might list an annual percentage yield in addition to an annual percentage rate. Although these figures are generally similar, APY is slightly different. APR is the stated interest rate that you’ll receive on your CD and APY factors in compounding interest. Pay close attention to the CD’s APY.
Current CD Rates
Now that you know how to find the best CD rates, here’s a look at current rates for five different banks and how much each would yield for a $5,000 deposit based on the rate and term length. Consider opening an account with one of these financial institutions:
|CD Interest Rates|
|Bank||CD||1-Year CD Rate (APY)||Final Balance for $5,000 Deposit||3-Year CD Rate (APY)||Final Balance for $5,000 Deposit||5-year CD Rate (APY)||Final Balance for $5,000 Deposit|
|Ally Bank||High-yield CD||1.35%||$5,067.50||1.55%||$5,236.12||2.25%||$5,588.39|
|American Express Bank||CD||0.55%||$5,028.00||1.25%||$5,190.00||1.70%||$5,440.00|
|Rates accurate as of July 20, 2017|
It pays to shop around when looking for the highest CD rates. Whenever your CDs come due, take a look at rates from competitor banks because CD rates change often. Whatever one you choose, make sure you can commit to leaving your money in for the CD’s entire term so you don’t have to waste your hard-earned cash on early withdrawal penalties.
Rates accurate as of July 20, 2017.
Editorial Note: This content is not provided by American Express. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone and have not been reviewed, approved or otherwise endorsed by American Express.