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What is a Certificate of Deposit?

September 10, 2019

If you're looking for an account to set some money aside and earn interest on it, a Certificate of Deposit is one option to check into. So what is a Certificate of Deposit, and how does it work? Also known as a CD, a Certificate of Deposit is a type of savings account that offers higher interest rate earnings than regular savings accounts; it also restricts your access to that money for a set term. After that amount of time has passed (your investment has matured), you can withdraw the original deposit and interest gained. Term lengths usually range between three months and five years, and they have minimum deposit requirements. Leaving your investment in a CD past its maturity date could cause it to roll over with the same interest rate or roll over without gaining any more interest. Are CDs worth it? Consider some of the pros and cons:

Pros

  • Low-risk, federally insured account
  • Typically have fixed interest rates
  • Guaranteed interest earnings

Cons

  • Penalty fee if you want to access your money before maturity date
  • You could miss higher-rate investment opportunities

And there are more points to consider. The longer the CD's term, the more you can make in interest. If you're sure you won't need to tap into your cash during the term, it could pay off. If you're wary of putting your money away for long stretches, you could go with a shorter-term CD that lasts months rather than years — and some banks offer no-penalty CDs. It's also possible to invest in a combination of CDs that mature on different dates. Whatever your choice, be sure that if you open a CD it ties in with your financial goals.

For more information on CDs, read:
- Certificate of deposit
- Certificate of Deposit: What Is a CD?
- Are Certificates of Deposit Worth It Right Now?
- CD Calculator