“How to Choose and Open the Best Certificate of Deposit (CD) for Your Needs”

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Understanding Certificates of Deposit (CDs)

Certificates of deposit, commonly known as CDs, offer higher interest rates in exchange for keeping your money deposited for a set period. You can open a CD at a bank, credit union, or brokerage, and typically you’ll have the option to do so online, by phone, or in person.

Before applying for and funding the account, it’s crucial to ensure you’ve chosen the right CD for your financial goals. Follow these steps to open a CD account with confidence.

Steps to Open a CD

Once you’ve decided that a CD is the best way to save your money, take these steps to choose the CD that best matches your needs.

1. Review CD Options

There are various types of CDs, each with different interest rates and fee structures. For example, a bump-up CD allows you to adjust your rate if the Federal Reserve raises interest rates during your CD term. Here are the different types of CDs you can choose from:

Types of CDs

• Traditional CDs: These provide a guaranteed rate of return and insurance on up to $250,000 per account holder at banks and credit unions. You’ll need to keep your money in the account for a fixed term, such as six months or a year, otherwise, you may pay an early withdrawal penalty.
• No-penalty CDs: These allow you to withdraw your entire balance without a penalty, usually after a week of funding the account. They may come with lower rates or additional fees.
• Jumbo CDs: These require a higher initial deposit, usually $75,000 to $100,000, and offer a higher interest rate in return.
• Bump-up CDs: These offer the opportunity to increase your interest rate if it has gone up since you first opened the account. This option may only be available once during your term.
• Step-up CDs: Similar to bump-up CDs, these automatically increase your interest rate at predetermined times during the term.
• Brokered CDs: These are bought through a brokerage firm and often carry a higher interest rate. They may also allow you to access your money before the maturity date without a penalty.
• IRA CDs: These are part of your retirement savings strategy and provide security in the form of guaranteed interest. They can be a standalone account or part of your current retirement portfolio.

2. Compare Interest Rates, Terms, and Fees

Since a high interest rate is often the primary benefit of choosing a CD, compare rates among various CDs to find the best one. Start by checking CD rates at your existing bank or credit union, then compare their offers to current rates at other banks, credit unions, brokers, and online lenders. Rates can change often, so check back regularly.

Keep in mind that your rate will likely be higher the longer the term you choose. While you can always opt for a no-penalty CD, you won’t be able to access the highest possible rates that way. Also, look for promotional CD rates, which are higher than usual for a limited time. Understand all fees, including early withdrawal penalties and intermediary fees for brokered CDs, and when your rate could change if it’s a promotional, step-up, or bump-up CD.

3. Apply for the CD

You can apply for the CD you’ve chosen online, in person, or by phone. When you apply, you’ll receive a disclosure statement with more details about how the CD works. Find out when, how often, and by what means your interest will be paid to you.

Understand whether the CD could be called by the issuer, meaning the CD term will end early. You’ll get your money back plus interest accrued, but you’ll need to find another CD account elsewhere.

4. Fund the CD

To start earning interest on your CD, make an opening deposit either online or in person. Some CDs, such as jumbo CDs, may require a minimum deposit, while others do not. Deposit an amount that you’re comfortable going without during the CD’s term.

FAQs

• Are CDs FDIC-Insured? Yes, CDs are typically insured by the FDIC up to $250,000 per account holder.
• Can You Add Money to a CD? No, you generally cannot add money to a CD once it has been funded.
• What to Do When Your CD Matures? When your CD matures, you can withdraw your money or reinvest it in a new CD.

The Bottom Line

Saving in a CD is a smart way to earn more interest than you would with a traditional savings account, and it’s safer than investing solely in stocks or other volatile instruments. To best take advantage of a CD’s unique features, open the CD that best fits your personal financial goals—in the type of CD, the length of the term, the type of interest rate, and the method of renewal.

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