But while there are many benefits to buying CDs, it also comes with limitations. It’s an ideal solution for some consumers, but not all. By learning as much as possible about the ins and outs of CDs, you can determine if it’s the right choice for you.
CDs Versus Savings Accounts
If you go to a bank to open a savings account, you may be offered the option of a CD instead. A CD is a type of savings account, so you won’t see much of a difference in setting it up. If you have your checking account with the same bank, you should even be able to view up-to-date information on your CD when you log in to check your balance.
One of the biggest differences between the two is in the interest rate you’ll earn on the money you have there. CD rates can top 3 percent, while savings accounts remain in the 0.01-2.0 percent range. One major difference, though, is that with a savings account, you can access your funds at any time, while CDs require that you leave your money in place for a minimum timeframe.
CDs are great if you have funds you can put into an account for six months or longer without accessing them. You’ll likely be given timeline options, but your return and opening deposit requirements will vary based on how long you leave it in.
At Bank of America, for instance, there are two types of CD accounts: Featured and Standard Term. With the Featured plan, you can’t access your funds for 12 months and the minimum opening deposit is $10,000. The Standard plan has only a $1,000 deposit requirement, but you can choose the term. CDs range from 28 days and 10 years and rates adjust.
Even though CDs aren’t as risky as other types of investment, they do come with a certain amount of risk. If the interest rates spiral downward during the term you’ve chosen, you could find that you gain less than you would have otherwise. But the biggest risk comes if something happens and you have to withdraw the money early. Early withdrawal comes with a penalty that varies from one financial institution to the next.
One way to avoid such situations is to set up something called a CD ladder. This involves purchasing multiple CDs, each maturing at different times. This will not only help you cover varying interest rates, but it will also prevent you from having all your savings tied up in one CD.
If you want the protection of a savings account with a higher interest rate, CDs are worth considering. Your preferred bank should be able to easily set you up with one, but shop around to make sure you can’t get much better rates elsewhere.