Certificates of Deposit - Choosing a CD

A CD of a Certificate of Deposit is a type of savings certificate with a specific fixed rate of interest, a fixed date of maturity, and issued in numerous denominations as long as it meets the minimum investment criteria. Access to funds in a CD is restricted till the date of maturity. CDs are usually issued by banks and come with an FDIC insurance of $250,000 per person. Before choosing a specific CD as an investment option, you should ask the below listed questions.

1. The minimum deposit: What is it?

   The amount invested in CDs determines the interest rate and the choices of CDs that you can invest in. Hence, before searching for the right CD for investment, you first need to decide on the amount that you want to invest. Some of the best interest rates come with only deposits of large amounts ranging from $5,000 to over $20,000. Investors who do not have such large sums of money should avoid looking at such CDs. However, good interest rates are also offered by some credit unions and banks wherein the minimum deposit ranges between $500 and $1,500.

2. How to determine the best term for a CD?

   Long term CDs come with a higher rate of interest. Investors who think that they will not need the funds for sometime can go for CDs with a five year maturity. In case they think that they will require the funds sooner than 5 years, then it is best to opt for a shorter term. You can also opt for a shorter term if there is a possibility of a significant rise in the interest rate in the future; doing so will allow you to re-invest when there is improvement in the returns. A step-up option that permits investors to re-invest in case of increase in rates is also offered by some financial companies.

3. Early withdrawal: Are there penalties for it?

   Most CDs have a penalty for early withdrawal. The penalty may be significantly higher in some credit unions and banks than others. Sometimes, investors may pay a lot more as penalty for early withdrawal as compared to the interest accrued. Hence, investors who think that there is a chance of them needing the funds before the maturity period is over should talk to the credit union or bank and find out the penalty that will be levied for early withdrawal of funds from CDs before investing in a CD.

4. What are the charges, fees?

   There are many credit unions and banks that charge no fees for CD creation or CD maintenance. Some banks may however charge a small fee. Hence, investors should inquire about fees, if any, before investing in CDs.

5. What after the CD reached maturity?

   Investors can withdraw their funds from the bank after the CD has matured. The CD may be automatically renewed by some banks, but all banks do not follow this auto-renewal process. Sometimes, if the money is not taken out by a ‘forgetful’ investor past the grace period, then the bank may charge fees. Some credit unions and banks may allow investors to renew the CD at the same interest rate. This can be very beneficial if there is a drop in the interest rates.