CD Rates

May 7th 2016

 

Overview

A certificate of deposit (CD) is a type of investment account that is offered at a bank or credit union. Typically, when you open a CD, you will be required to invest your money for a certain period of time, which can be months or even years.

CDs tend to require an investment of at least one-thousand dollars. When you open a CD, you will receive an interest rate for that time period, which is called a fixed term.

During that fixed term, you will earn interest on your invested money. At the end of the investment period, your account will have "matured." Some CDs require investors to pay a fee while other CDs are available free of charge.

When you invest your money in a CD, your interest rate will be fixed for that specified term. Once your investment matures, you will receive a new interest rate that is based on the current market conditions. At this point, you will have a limited window to choose whether or not to reinvest your money in the CD. It is recommended that you shop around for the highest CD rate.

 

How It Works

Generally, CDs require a minimum deposit of several thousand dollars. The larger your deposit, the larger your interest rate and earnings will be.

The amount of money that you invest is called your principal balance. When your CD matures, you'll receive your principal balance and whatever interest that you earn. If you withdraw money before your CD reaches maturity, you may be subject to a penalty fee.

Some banks even allow you to choose how you would like to earn your interest payments. You may choose to have your interest payments deposited in your checking or savings account on a monthly or quarterly basis. You can also cash out your interest payments after your CD has reached maturity. A third option is to reinvest your interest with your principal at the end of each interest period. Interest may be reinvested on a monthly or quarterly basis.

If you need to withdraw your money from a CD, you will need to pay a penalty fee that varies based on the initial investment.

Benefits

CDs typically offer interest rates that are higher than checking or savings accounts. Unlike other investment options, CDs carry no risk of loss, provided that you do not need to withdraw your money.

Higher principal balances make you eligible for higher interest rates. All that you need to do is leave your money untouched in an account for a number of months or years after settling on the highest interest rate possible.

Cost/Pricing

Most CDs are available free of charge and require a minimum investment of one-thousand dollars. Some institutions allow lower principals. Typically, higher principals will earn interest at a higher rate. Lower balances tend to quire a longer period of investment.

Be aware of your financial institution's policies on CDs. Some institutions automatically renew your CD for another term if you do not withdraw your money within a few days. You may have a limited window to shop for a higher interest rate or type of investment account.

Highest CD Rates

CD rates vary based on economic conditions. In general, interest rates tend to cycle from high to low. When you agree to an interest rate and sign up for a CD, you are committed to that interest rate for a fixed term which could span a period of months or years.

In general, longer term investments earn the highest CD rates. Larger principal balances will also earn higher interest rates. One strategy for earning high interest rates is to invest a large sum of money for a long period of time.

Moreover, CDs are available from a variety of financial institutions. It is recommended that you shop around for the highest interest rates, especially when your CD is about to reach the end of its term. You may only have a few days to withdraw your funds and reinvest in another account, so you will want to research interest rates as close to that window of time as possible.

To ensure that you receive the highest interest rates, you must monitor interest trends over an extended period of time. This process will provide an indication of economic conditions, and you may be able to predict whether interest rates are rising and falling. If you expect interest rates to rise, you should hold off on investing your money. If interest rates are falling, you may want to invest your money now. You may also choose shorter investment terms while you are monitoring market conditions.

Timing

The best time to open a CD is when the interest rates are high so that you make more money. If you invest for a long period of time, you will likely receive a higher interest rate than if you were to invest for only a short amount of time.

Companies/Industries

You can open CDs at banks, credit unions, and other financial institutions. Many companies sell CDs that come with an insurance plan from the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). The FDIC insures the CD accounts at banks, while credit union CDs are insured by the NCUA.

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