Certificates of Deposit (CDs) are a popular choice among investors seeking a low-risk savings option with a guaranteed rate of return. When considering investing in a CD, there are several important factors you should take into account to ensure it aligns with your financial goals.
One of the first things to check when purchasing a CD is the interest rate, also known as the annual percentage yield (APY). The APY can vary significantly from one bank to another, so it's important to shop around and compare rates. Remember, a higher rate will yield more earnings over the CD term.
CDs come in various term lengths, ranging from a few months to several years. The term length you choose should align with your financial goals and cash flow needs. Keep in mind that a longer term usually offers a higher interest rate but also requires a longer commitment of funds.
Penalty for Early Withdrawal
CDs typically require you to keep your money in the account for the full term. If you withdraw your funds early, you'll likely face a penalty, which could eat into your earnings. Make sure to understand the bank's early withdrawal penalties before committing your money.
How often interest is compounded can affect your overall return. The more frequently interest is compounded, the more you'll earn. Some CDs compound interest daily, while others do it monthly, quarterly, or annually. Be sure to find out the compounding method and calculate how it impacts your potential earnings.
Make sure that the bank or credit union where you open your CD is insured by an organization like the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). This insurance protects your money up to certain limits if the institution fails.
Automatic Renewal Policies
Some CDs automatically renew at maturity, which means they start a new term if you don't withdraw your money or make changes during the grace period. Check the institution's renewal policies, including the interest rate for the new term, to avoid any surprises.
Callable or Brokered CDs
There are two types of CDs available to most people. Callable CDs allow the bank to "call" or end the CD after a certain period, potentially leaving you with a lower interest rate. Brokered CDs, bought through a broker, can offer higher rates but may carry more risk and complexity.
Some banks offer CDs with special features. For instance, bump-up CDs allow you to raise your rate if interest rates increase, while add-on CDs let you deposit more money into your CD after the initial purchase.
Contact a company like Bellco Credit Union to learn more.