What are Certificates of Deposit? – How Do They Work?

Certificates of Deposit are one of the best investment options available in present time. Almost every bank and credit union offers attractive plans regarding Certificates of Deposit (CDs). These are considered as the safest form of time deposit. Basically you need to deposit a specific amount of money and the respective bank/credit union will issue Certificate of Deposit for you.

When you invest money as deposit, it has a fixed time period. The bank or credit union will pay your interest based on the time period of CDs. If you want to earn more interest then you should invest more money for a long period of time. You should not withdraw the deposit amount until the term period gets over. You may have to pay charges for early withdrawal to concerned bank.

What are Certificates of Deposit?

An investment in a bank or credit union in form of time deposit is called Certificate of Deposit. Certificates of Deposit are superior than Savings Account. They are risk free investment with higher interest earning. You can earn higher rate of interest on CDs than what you earn with your Savings Account.

Why do CDs have Higher Interest Rate?

You earn interest on the balance available in your savings account. But the interest rate is quite low that you can’t see any financial growth. Certificates of Deposit offer much high interest than savings account. CDs are helpful to grow you financially and meet your future goals. The reason behind the higher interest rate is that your money is locked for a certain period when you invest it in CDs.

How Do CDs Work?

Certificates of Deposit is the money you give to the bank or credit union for a certain period. In return, the bank pays you impressive interest on maturity. When you open CDs, your money is locked for the fixed time period. And it will be used by the bank or credit union until the maturity date. When the CDs get matured i.e. term period is over, you will get your money back with applicable interest. This is how the CDs work and you can earn a handsome amount of interest on your invested money.

Time Period of CDs (Certificates of Deposit)

Certificates of Deposit is an investment for a fixed time period. The banks and credit unions offer various CDs Plans for their customers. The term period is in days, months and years. You need to choose your suitable time period for your CDs.

CDs Terms and Conditions

Everybody wants to earn a good interest on their investment, but it’s wise to know the terms & conditions. Certificates of Deposit are the safest and risk-free investment option for all. The only condition is that you cannot withdraw the money before the maturity of CDs. In case you break the CDs in between the deposit date and maturity date, you have to pay penalty. Such penalty is known as Early Withdrawal Fee.

Minimum Amount to Open CDs

CDs are opened with the minimum amount limit set by concerned bank or credit union. Some banks have set $500 as minimum, while the others have set as $1000. If you wish to invest less than $500 then there are several banks/credit unions which open CDs without any minimum amount condition.

Interest on Certificates of Deposit (Int. on CDs)

There are three types of interest you can earn on CDs (Certificates of Deposit).

01. Fixed Rate CDs

When you open Certificates of Deposit with Fixed Rate Interest, you will receive fixed annual interest for the whole period. For example: If you open a CD for 2 years with fixed 1.5% interest, you will get your principal amount and two years’ interest on maturity.

02. Adjustable Rate CDs

CDs with adjustable rate allows the customer to adjust interest rate during the term period. When you open such Certificate of Deposit, the bank will allow you to adjust the rate a few times as per rules. On maturity of CDs, you will get principal amount and earn interest as per adjusted rate.

03. Variable Rate CDs

CDs with variable rate of interest are known as Variable Rate Certificates of Deposit. When you open such CD, the term period is fixed, but the interest is computed at variable rate. It is also called CDs with Fluctuating Interest. For example: The interest rate is 1.5% when you open a CD, the rate is increased to 1.7% in next year. So the bank will pay you capital amount and interest on maturity of CD. The interest will be calculated on the basis of increase in that time period.

Thus, now you know all basic information about Certificates of Deposit (CDs). So we recommend you to open a CD today and make a plan to meet all your future financial goals.

Updated: March 8, 2019 — 6:13 am

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