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How Do Certificates of Deposit (CDs) Work?

    

SUMMARY: Find out how CDs work, including terms, rates, penalties, and benefits. 

3.2022 How Does Bank CDs Work Blog Image

A certificate of deposit functions like a savings account, except CDs always earn money because they pay a fixed interest rate for a set period, as long as you do not withdraw the funds early. But how does a CD actually work? Here's a look at terms and rates, as well as how they mature, how they differ from checking and savings accounts, and more.

CD Terms

Without a doubt, the terms are vital in understanding how these accounts can work for you. Opening a CD account requires you to select a timeframe. Fixed terms can range from three-months to long-term from five up to 10, or even 15 years. But, should you withdraw funds before the end of the term, your rates can be impacted, and early withdrawal penalties typically apply. The longer the term, the more you earn. 

CD Maturity

A CD account differs from a checking or savings account since the money in it "matures" on a set date. At that point, the fixed interest rate is applied and you can withdraw your funds. Of course, if you remove funds prior to the maturity date, penalties will apply and can range from a few months' up to a year's worth of interest.

CD Rates

Certificate of deposits differ from most savings accounts because the interest rate is fixed and stays the same over the entire term. Typically, they offer lower interest rates than other investments, such as stocks, bonds, or real estate. In fact, many don't pay more than 1% APY1 in interest but they offer the return at the end of their term no matter what. 

CDs are Low Risk

CDs opened at a bank that is FDIC-insured (Federal Deposit Insurance Corporation) or a credit union insured by the National Credit Union Administration are incredibly low risk. Even if the financial institution holding the account fails, your money is still safe. All you need to do to save money and make a bit of guaranteed money in the process, is open an account and let it mature.

How to Use a CD

If you who would like to save money and reach your savings goals without wading into the volatility of the stock market, a CD is a solid choice. While the amount of interest earned won't reach serious investor levels, it is a safe option and a great way to stash money aside for the future—provided you don't dip into it early.

Interested in a traditional CD or IRA CD? TDECU offers a wide variety of options, including no-penalty CDs, Jumbo CDs, and more. Call us today at (800) 839-1154!


1APY = Annual Percentage Yield

Sources:

https://www.credit.com/blog/how-do-cds-work-188479/
https://www.nerdwallet.com/article/banking/how-do-cds-work

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