A certificate of deposit (CD) is a type of savings product that has a higher rate of interest than a traditional savings account. CDs are offered by banks, credit unions, and online financial institutions. It is a good investment opportunity if you do not need to withdraw the money deposited until the savings mature. You should consider opening a CD if you want to earn a high interest without the risk of market volatility.
Key aspects
Here are the key things to know about CDs:
Duration: The duration of the certificate of deposit, also called term length, is the period for which the lump sum is to be maintained. This period usually ranges from three months to five years, the end of which is known as the maturity date.
Principal: The principal is the amount you agree to deposit when opening a CD. Certain banks and financial institutions may set the minimum lump sum limit.
Interest rate: The interest rate will depend on various factors, such as the bank or the financial institution, the term length, and the current market interest rate.
Penalty: If you need to withdraw some money from the CD before the maturity date, you will need to pay a penalty or fee. Depending on the issuer, the fine may be equal to the earned interest over a period, the percentage of the withdrawal amount, the percentage of interest earned, or a flat fee. Typically, longer-term CDs have higher penalties.
Advantages
Guaranteed returns: With a CD, you can easily determine how much interest you will earn over time and be assured of the returns. As the interest rate is fixed for the entire term, you can calculate the amount you need to deposit to get a good return when the term ends.
Higher interest rate: The interest offered for CDs is higher than savings or money market accounts, as you agree to lock in your lump sum for a fixed period.
Safety: Certificates of deposits is a safe investment option, as the money held in this account is insured, so you won’t lose the money even if the bank or credit union fails. CDs are insured up to $250,000 per depositor when bought through a federally insured financial institution. Second, the rate of interest is fixed, reducing the risk of volatility of returns.
CD laddering: You can build a CD ladder by opening multiple CDs of different interest rates and maturity dates. This way, you will not only get access to CDs that mature early but also receive the benefit of deciding whether to take money out or reinvest to take advantage of higher rates.
No monthly maintenance fees: CDs do not come with any monthly maintenance fees, unlike savings or money market accounts.
Current 1-year rates
Financial institutions offer distinct interest rates depending on the term length, type of CD, amount of initial deposit, and benchmark interest rates set by the Federal Reserve. Typically, the rate of interest is higher with a higher lump sum and longer term. Here are the interest rates of some of the CDs on the market for a one-year term:
Alliant Credit Union Certificate: You can earn a 5.15% APY (annual percentage yield) with a minimum deposit of $1,000. The interest on the deposit amount is compounded monthly.
Barclays Online: Barclays Online offers a certificate of deposit rate of 4.90% compounded daily and has no minimum deposit requirements.
Bread Savings: This online bank offers an interest rate of 5.2% APY compounded daily with a minimum deposit of $1,500.
Synchrony Bank: The CDs here do not have a minimum deposit requirement and have a 4.75% APY compounded daily.
Marcus by Goldman Sachs: Its CDs require a $500 minimum deposit, and the APY of 4.75% is compounded daily.
BMO Harris: BMO Harris offers CDs with a minimum opening deposit of $1,000 and an interest rate of 5.10% compounded daily.
BrioDirect: BrioDirect requires a minimum deposit of $500 with a 5.25% APY compounded daily.
Bethpage Federal Credit Union: This credit union has set a low minimum deposit requirement of just $50 and offers an interest rate of 4.75% compounded daily.
Capital One: With no minimum deposit for opening a Capital One CD, you can get 4.15% APY compounded monthly.
Crescent Bank: Crescent Bank offers an APY of 5.05% compounded quarterly and requires a minimum deposit of $1000.
Connexus Credit Union: This credit union requires a minimum deposit of $5000 to earn a 4.91% APY compounded daily.
A certificate of deposit is a secure investment product designed to help you save money. Before tying up your cash for a long period, you should read the disclosure statement that outlines all the terms, including the interest rate on the CD, mode of interest payment, penalties for early withdrawal, and other important details.