What is a CD? A certificate of deposit is a safe investment option with predictable returns and a guaranteed return of your principal investment when the CD matures. Because CD accounts earn higher interest rates than most savings and money market accounts, they’re appealing to bank customers looking for low-risk ways to build savings.
Although a high-yield savings account’s rate — like Ally Bank’s Online Savings with its 1.45% APY — might sound impressive, your rate is not locked in on a savings account like it is with a CD.
When you invest in a CD account the FDIC or NCUA will insure your deposit, depending on whether you opened the CD at a bank or a credit union. Keep reading to find out nine helpful ways to choose a high-interest CD account that will fit your financial plan.
How to Choose a CD Account
You must take into account several factors before making a final decision on which CD is the best for you to open. Use these nine tips to help you choose the best CD:
1. Consider Your CD’s Term
When you open a CD account you don’t want to withdraw your money early because you’ll incur an early withdrawal fee. While your money is locked into your certificate, you’ll earn dividends based on your interest rate. When reviewing CD options, consider how long you can afford to invest your money.
If you’re saving for a short-term goal, like a vacation or new car, you might want a CD with a six- or 12-month term. But if you’re looking for a low-risk way to build retirement savings, you’ll want a longer-term product.
2. Compare CD Interest Rates
Before you settle on a CD, shop around — the goal is to find a high-yield CD with optimal terms for your needs. Compare is each bank’s annual percentage yield — the APY takes into account how often your interest rate compounds.
Know what current CD rates are before you agree to any terms. The national average rate for a one-year CD as of Oct. 23, 2017, is 0.28% APY for deposits of less than $100,000, according to the FDIC. The average rate for a five-year CD is 0.88% APY.
3. Keep Tabs on Expected Rate Hikes
It’s good practice to keep an eye on the market and purchase CDs based on any expected rate hikes. For example, the Fed will likely raise rates a quarter-point this December, according to Kiplinger.
Taking that information into account, if you want to get the better rate you’ll need to purchase short-term CDs at the current rate and cash them out in December. You can use that money to open a long-term CD with the higher rate when it takes effect.
4. Explore Different Product Types
A traditional CD account allows you to earn money at a fixed rate for the certificate’s term. Other types of CDs offer adjustable rates or features that allow you to bump up your rate or access your money before it matures. Here are some alternatives to traditional CDs:
- Bump-up CDs: If rates rise during your bump-up CD’s term, you have a one-time option to upgrade your certificate to a CD with a higher rate.
- Indexed CDs: An indexed CD’s returns are tied to the performance of a market index, such as Standard & Poor’s 500 index — or to bonds, currencies or commodity prices. If you end your term early, there’s no guarantee you’ll get your full principal back.
- Callable CDs: Callable certificates tend to have longer terms, like five or seven years. Although callable CDs might have higher rates than traditional CDs with the same terms, a bank can cancel this type of CD at any point.
- Brokered CDs: A brokered CD is a CD through a brokerage firm rather than a bank or credit union. You’ll likely get a higher interest rate on one of these than bank CD rates.
5. Try CD Laddering
If you have long-term savings goals but want to have some flexible access to your money, you can build a CD ladder. The CD ladder approach involves opening multiple CDs with different maturity dates.
With $5,000 to invest, for example, you could purchase a 12-, 24-, 36-, 48- and 60-month CD for $1,000 each. As each one matures, reinvest those funds in a 60-month CD. You’d then have one CD maturing every year — at a higher interest rate.
6. Look at Minimum Deposit Requirements
Financial institutions and CD savings account products have different minimum deposit requirements. A required deposit amount can range from $0 up to thousands of dollars.
The online bank CIT Bank, for example, offers some of the highest CD rates available. To invest in its six-month CD with a 0.72% APY or its one-year CD with a 1.32% APY you would need to deposit a minimum of $1,000. Chase also requires a $1,000-minimum deposit to open a CD. However, Chase’s rate — compared with CIT Bank’s — is a paltry 0.02% APY
7. Factor in Withdrawal Fees
Withdraw your money before your CD matures and you’ll be subject to early withdrawal fees, which vary by financial institution and brokerage firm. If, however, your institution has a low early withdrawal penalty, it might be advantageous if interest rates rise and you want to cash out to reinvest. Calculate the withdrawal fee first, then compare that with the interest you’d earn from opening a new CD with a higher rate to determine if it’s wise to cash out early.
8. Confirm the CD Is Insured
Always make sure your time deposit, share certificate or money market account is FDIC- or NCUA-insured. Both entities insure CDs for up to $250,000 of their value in case your financial institution fails.
9. Avoid Automatic Rollovers
Once your CD reaches maturity, you’ll have the option to cash out or allow the bank to automatically rollover the money into a new CD with the same terms. A rollover is not always the best option, according to the Financial Industry Regulatory Authority.
Before you allow your bank or credit union to rollover your CD, see if you can earn a better interest rate at your financial institution or one of its competitors. Also, take a look at your financial situation to figure out if you’d be better off investing in a CD with different terms.
Rates are accurate as of Oct. 23, 2017, except for Ally, whose rates are accurate as of today.