Certificates of Deposit, or CD's, are sound investment options in comparison to standard savings accounts. CDs are one of the least risky, most secure, and increasingly rewarding investment options available to account holders. Many banks, credit unions, or other financial institutions offer CD deposits for clients of various financial backgrounds. Getting the best interest rate for your CD dollars is often key to maximizing your investment and requires carefully comparing your CD options and financial needs.
CD interest rates vary tremendously and have very specific fixed terms in relation to the amount of the CD investment and length of time until maturity. Most banks offer CDs requiring a 3 month up to 30 year investment. Initial CD deposits can range from $1.00 to millions of dollars depending upon an account holder's financial status. Most CD rates have a fixed interest rate and most financial organizations require that account holders only withdrawal the amount of interest paid on a CD until it reaches maturity or the account holder pays an often hefty penalty. Reinvesting any interest gained on a Certificate of Deposit allows your balance (and investment) to grow.
Choosing The Best CD Rates
Sourcing out the best CD interest rates generally requires comparison shopping with multiple financial institutions. Generally CDs with longer time periods until maturity are better "rewarded" with higher interest rates, though there are some exceptions. As interest rates fluctuate frequently, the state of the economy often dictates and greatly influences the best CD rates. Frequently, the best interest rates are found in Jumbo CDs offered to account holders with sizable investments for long lengths of time.
Local vs. Online Banks
Most local banks attract customers with "CD sales" advertised in newspapers and banners. Local banks often must attract and ensure new deposits quickly and often give local customers the best CD rates. Online only banks offer great CD rates and feature decreased service and operating fees over traditional "brick and mortar" banks. Most online only banks offer savings options to their customers that other banks do not. Online banks and online financial institutions may ensure the overall maximization of your CD investment.
Credit Unions regulated by the National Credit Union Adminstration (NCUA) also offer competitive, if not higher, CD rates. As the NCUA offers generally the same amount of protection as banks regulated by the Federal Deposit Insurance Corporation, credit unions are just as safe as most banks. Investors have often historically chosen to invest CDs within banks over credit unions because of the perception that banks are more safe though credit unions often offer better interest rates. Credit unions are owned and operated by members who act on behalf of the entire organization unlike banks who act upon shareholder's dividends. Credit unions may not only offer the best CD rates but also other advantages as well. When choosing a financial organization, always check for transparency of business and weigh all options.
Consulting a broker or financial advisor may be helpful for some investors. A broker often provides depositors with lesser balances increased opportunities to receive improved CD rates. Brokers often incorporate funds from many small investors to negotiate higher CD rates with banks or other financial institutions. Additionally, brokers often may offer services to account holders allowing funds to be withdrawn prior to the CD's maturity by selling an investor's stake in the CD to other investors within the open market. The practice sometimes may result in a better investment yield for the account holder if interest rates are higher than when the CD originated. Conversely, if interest rates have fallen, the practice can have a reverse effect and decrease the balance of the original investment. Brokers also charge investors for their services yet usually banks and credit unions will perform transactions without any fees or added costs.
Upon maturation of your CD, banks will notify account holders of a window period, typically lasting 10-15 days, which allows you to decide to rollover the CD into a new account or withdrawal all of or part the funds for investing elsewhere. Many banks automatically reinvest funds from a CD if the account holder does not respond to the maturation notification.
CDs offer a higher interest yield over traditional savings accounts. When choosing the best CD rate, it is in your best interest to comparison shop to find the best interest rate and specified CD maturity period which best meets your financial needs and situation. Also consider a bank's standard of customer service and transparency of business practices to ensure your questions and needs as a customer are met by the financial institution.