Everything You Need to Know About Certificates of Deposit Everything You Need to Know About Certificates of Deposit
Certificates of Deposit, or CDs, are a common interest-bearing deposit account offered by most financial institutions. They are lucrative because they usually offer higher interest rates than traditional savings accounts that remain fixed for the account term in exchange for leaving the funds in the account untouched until it reaches maturity.
Common Certificate of Deposit Terms
Certificate of Deposit (CD): A type of bank account offered by financial institutions that comes with a fixed interest rate for a set term. Most CDs have early withdrawal penalties preventing you from accessing your money before the account reaches maturity.
Fixed Interest Rate: Most CDs come with a fixed interest rate meaning that, unlike savings accounts, the interest rate of the account won't change during the account term based on market conditions or changes to the federal funds rate.
Annual Percentage Rate (APR): The rate of interest earned by a CD account in a year not including compounding interest. Most deposit accounts express APR as "interest rate."
Annual Percentage Yield (APY): The actual annual rate of return for a CD factoring in compounding interest.
CD Term: CDs have a fixed period of time that the funds must be left in the account without being withdrawn, known as a “term”. The term is chosen by the depositor when they open their account ranging from one month to five years. Once the account is opened, the depositor must leave their initial deposit untouched until the account reaches maturity unless they are willing to pay an early withdrawal penalty.
Early Withdrawal Penalty: A fee attached to most CD accounts that will only be assessed if the depositor withdraws funds before the account reaches maturity.
Maturity Date: The date when the CD account term ends and the depositor can access their funds again. The maturity date is often preceded by a grace period of a few weeks when the depositor can withdraw their funds, transfer them to another account, or renew the CD.
Grace Period: The period of time (usually one or two weeks depending on the financial institution) preceding a CD's maturity date where the depositor can access their funds -- either withdrawing them, transferring them to another account, or renewing the CD for another term. Most banks and credit unions will notify you about a month before your maturity date with details on your account's grace period.
Automatic Renewal: Most financial institutions will automatically renew a depositor's CD and reinvest their money into an account with the same term (but current interest rate) if the depositor fails to take action during an account's grace period.
FDIC Insured: The Federal Deposit Insurance Corporation, or FDIC, is the government institution that guarantees funds held in deposit accounts, including CDs, up to an aggregate amount of $250,000 for all of your accounts at one financial institution. [HL1] Plus, Leader Bank is proud help our clients maximize access to coverage beyond this limit through the IntraFi Cash Service network!
CD Ladder: A CD ladder is a strategy involving investing a sum of money across multiple CDs with different term lengths. This allows depositors to take advantage of the higher rates of CDs while maintaining more liquidity with their funds.
No-Penalty CD: A CD that allows access to deposited funds before the maturity date without incurring an early-withdrawal penalty. No-Penalty CDs generally have lower interest rates than traditional CDs.
Bump-Up CDs: A CD that allows the account holder to increase their interest rate one time if rates increase during their account term.
Certificate of Deposit Resources
What is a Certificate of Deposit?: Learn how CDs work, how they differ from savings accounts, and more!
What is a CD Ladder and How to Build One: A CD ladder is a savings strategy involving opening multiple CDs with different terms.
CDs vs. High-Yield Savings Accounts: CDs and High-Yield Savings Accounts are both low-risk, interest-bearing deposit accounts.
Using CDs for Retirement Planning: CDs are a low-risk retirement savings option with a guaranteed rate of return.
What to Do When Your CD Matures: When a CD matures, you have several options for what to do with your funds.
Should You Use CDs For Your Emergency Fund?: A CD might not be the ideal way to grow funds you’ve set aside for emergencies.
How to Choose the Best CD Rate: Before selecting a CD rate and term, it’s important to review your financial goals.
How to Use CDs in an Uncertain Economy: CDs are a great, low-risk investment option insulated from market factors.
CD Calculators
Certificate of Deposit Calculator: Calculate your potential earnings from a CD with a term of your choice!
CD Savings Comparison Calculator: Discover just how much you can grow your savings with a Leader Bank CD!
