Certificates of Deposit

The Basics

You can get a certificate of deposit (CD) through almost any bank, while share certificates are available exclusively at credit unions. They are similar products. With both products, you essentially promise that you’ll leave a certain amount of money in an account for a specified amount of time. In exchange for not accessing the money during that period, the bank or credit union offers high interest rates on the deposited amount.

The length of a share certificate or CD can vary, but anywhere between six months and five years is common. There is usually a minimum required deposit—around $500 is typical. The money you deposit is referred to as the principal, the length of time you’re required to leave it in is the term, and the end date when you can withdraw the money without penalty is the date of maturity. The interest rate, and annual percentage yield determine how much you’ll make in interest off your initial deposit.

Cashing Out

When a CD or share certificate matures, you generally have a time limit to decide what to do with the money. If you take too long to decide what to do, the financial institution may roll over your money into another CD or share certificate for the same term at the current interest rate—this could be more or less than you expect. If you want to take the money out after the date of maturity, you can ask the bank or credit union to move the money into another account or send you a check. Some institutions have you designate an account when you open the CD, but offer flexibility to change if you decide to reinvest.

It is possible to access the money before the CD or share certificate matures, but if you do so, you’ll face penalties and fees. Consider a shorter term if you think you might need the money sooner than later.

Compound Interest

What you actually earn on your CD or share certificate is the yield— specifically the annual percentage yield (APY). There are two types of interest: simple and compound. Simple interest is paid only on the principal you initially invested. Compound interest adds in the money that has been earned. Good news: CDs and share certificates usually earn compound interest, so you’ll earn more money over time.

Benefits

CDs and share certificates can be a great tool for earning more interest than a typical savings account without tying your money up longer than needed or introducing risk. Here are a few more benefits of this type of product.

• Higher yield than a regular checking or savings account
• Choose the term that works for you
• Interest rate is fixed for the full term
• Stable despite any economic changes

Disclaimer

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