5 Steps to Choosing the Right Certificate of Deposit

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  • Choosing the right CD term probably depends on the timeline of your goals.
  • Decide whether you want a traditional CD or a special type of CD.
  • Check out the penalties for early CD withdrawals and what your options are when the CD is due.

A certificate of deposit is a low-risk, interest-bearing option that can be ideal if you don’t need instant access to some of your savings.

Once you’ve decided that a CD is the best option for earning some interest on your money, however, you should look at more than just CD prices. Here’s what to look for first to ensure you find the right CD for you.

1. Decide which CD type is right for you

CDs vary between financial institutions. Below are the most common types of CDs found at banks and credit unions:

  • Traditional CD/stock certificate: A traditional CD (or stock certificate if you’re looking for credit unions) can be found at most financial institutions. A CD is a kind of savings account. It offers a fixed interest rate if you hold money in one account for an entire term. With a traditional CD, you are only allowed to deposit money when you open a CD or when it is mature.
  • Step-up CD: A step-up CD is a type of certificate of deposit where a financial institution increases the interest rate at least once before its term expires. Step-up CDs offer a guaranteed increase on a specific date, and the bank’s website will usually state when the interest rate change occurs. Some financial institutions that offer step-up CDs are US Bank, TD Bank, and VyStar Credit Union.
  • Bump-up CD: A bump-up CD also allows you to get a higher interest rate before the end of the term. However, instead of receiving a guaranteed rate increase, you may request a rate increase only if the financial institution increases its rate on CDs before the end of your term. Synchrony Bank and Bethpage Federal Credit Union are two financial institutions with kick-off CDs.
  • Penalty CD: With this type of CD, you won’t be charged a prepayment penalty if you need to withdraw some money from the account before the term expires. Ally, Marcus, and America First Credit Union are some banks and credit unions with toll-free CDs.
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Once you know what type of CD you want, you can start narrowing down your options by considering which term works best for you.

2. Determine which CD terms match your goals

Depending on the financial institution, the CD term can range from just seven days to ten years. When trying to choose a CD term, you want to have a clear idea of ​​how long you can keep the money in an account without having to take it out.

“I would start by thinking that I have those dollars in a checking or savings account. what is it for When do I plan to use it? How much will this purchase or investment require? Based on those answers, then you’ll have a much better idea of ​​whether a CD makes sense, and if so, how long the CD lasts,” said Kevin Mahoney, a CFP® expert and host of Financially Well, a finance podcast for millennials.

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CD laddering is also often used as a strategy when you want to take advantage of competitive interest rates but don’t want to invest all your money in a long-term CD. With a CD ladder you open several CDs with different terms. For example, you can open a 1-year CD, a 2-year CD, and a 3-year CD at once and split your money between those three CDs.

One of the main benefits of creating a CD ladder is that it offers more flexibility. For example, if CD interest rates increase, you may be able to take advantage of higher interest rates once your shorter-dated CDs mature. If you need to access your money sooner than expected or are concerned about prepayment penalties, CD ladders can also be helpful as you can access a portion of your savings at the end of each term.

3. Compare different financial institutions

Choosing the right financial institution can also make a huge difference when it comes to getting strong CDs.

Online banks or credit unions usually offer the highest CD rates. Meanwhile, national banks usually offer low interest rates that are either equal to or lower than the average CD.

You should also keep in mind the minimum amount required to open a CD. The minimum opening deposit varies from bank to bank. Some financial institutions will allow you to open an account with $0, but generally a minimum of $1,000 is required to get a CD.

4. Check penalties for early CD withdrawals

Although CDs don’t have monthly service fees like regular savings accounts or money market accounts, be aware of the penalties for early withdrawals. A prepayment penalty is a fee for withdrawing money from your account before the due date.

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“If you want to earn the rate that the CDs offer, you have to keep them in that CD for a certain amount of time. I think that’s the variable that’s most likely to trip people up,” Mahoney says. “These numbers can be very appealing on the surface, but you have to consider when you need the money and whether the terms of a particular CD actually work for your circumstances.”

5. Knowing what happens when a CD matures

You should also consider what happens when a CD matures. For example, does your CD auto-renew? If this is the case, you should see how long the grace period for making changes to the account is before it is renewed. During the grace period, you can withdraw any amount of money from a CD without incurring any penalties. You can also choose to deposit more money on a CD and have it renewed for another term.

You may also want to know how to close a CD at a financial institution. Some banks will allow you to close a CD online, while others may require you to call customer service instead.

The final result

Before you get a CD, narrow down your options by figuring out the type and runtime of the CD you want. CDs are not as accessible as other types of savings accounts. So think about how long you can keep money in the account without potentially facing prepayment penalties. Also, make sure you know what steps to take once your CD is mature.

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