A certificate of deposit is a type of savings account, which generates an interest rate higher than the national average of 0.41% interest rates of traditional savings accounts. Most American banks will have you sign a contract not to pull your savings out of this account, while it is accumulating interest until the end of the agreed time. This is what makes CD accounts special and different from a typical savings account.
If you are new to banking, you may or may not have heard of a certificate of deposit. I do not blame you. Some banks rarely offer a certificate of deposit account like they do with their traditional savings accounts, when you are trying to open a bank account.
Personally, this has been my experience living in the United States. Has it been your experience too, my good reader?
Unless you ask your bank for a CD banking account, they may not typically bring it up. The ridiculous thing is most banks you will bank with, have a type of CD account meant for customers who want their savings accumulating a good interest. This is especially, when they have a large sum of money to save.
Having gotten that off my chest, here is how CD works.
How Does A Certificate Of Deposit Account Work?
How CD works is simple. You agree to deposit money into a CD account, which is locked for a set term while it generates interest. Usually, there is a penalty for early withdrawal from a CD account. Some banks will penalize you, when you try to withdraw money before maturity date.
What is a CD maturity date, good reader?
CD maturity date refers to the end of a CD term. It is when you get your money back with its accrued interest. How long it takes for a CD to mature, depends on the contract with your bank. Some banks have 6 months to 18 months CD maturity dates. Once you get a certificate of deposit, you do not have to do anything until maturity date.
What Is the Purpose Of A CD Account?
The purpose of a CD account is to secure your savings. This is while it is paying you an interest rate on your deposited principal. I always say it is the best account made for young working class adults.
This is because a typical CD account will pay an interest rate higher than your traditional savings accounts. I will discuss the national interest rates on CD accounts and some examples of the best CD rates out there. Just keep reading the article.
Different Types Of CD Accounts
How many types of CDs are there?
There are different certificates of deposit accounts. I have created a table below with a summary of what you need to know about the various certificate of deposit bank accounts.
| Types Of CD Accounts | What You Need to Know About It |
|---|---|
| Traditional CD | It has a fixed interest rate. You need to deposit money once into the account. |
| Jumbo CD | It requires a minimum deposit of at least $50,000 to open one. |
| High-yield CD | It has a better return on your money than traditional CD accounts. |
| Zero-Coupon CD | It is a type of CD where you buy a CD account of a known value at a discounted rate. You will not receive any interest payment, but at the end of term, you will receive the amount the CD is worth prior to discount. |
| Brokered CD | This type of CD account is offered by brokerages. The FDIC does not back all brokered CDs. |
| Bump-Up CD | It pays a low interest rate. You can ask your bank to adjust interest rate, whenever the bank starts a new or higher interest rate on its CD. |
| Callable CD | Your bank reserves the right to give you back your money and interest before maturity date. |
| Step-Up CD | You can get a higher interest rate before maturity date. |
| Liquid CD | There is no CD early withdrawal penalty. |
| IRA CD | It is best for people saving for retirement. |
Choosing a bank to set up a CD depends on what your financial goals are. I will recommend asking a bank about the pros and cons of the certificate of deposit types being offered to you. It is a good way of knowing whether a particular type will help you meet your financial goals.
What Is A Certificate Of Deposit Minimum Balance Account?
A CD banking account may require a minimum deposit. According to Annuity organization, a certificate of deposit typical minimum balance account is $1000. While most banks will require you to deposit $1000, there are some banks that offer CDs for beginners with low minimum balance. A few large banks offer CD accounts with no minimum balance requirement at all.
I have summarized a few nationwide banks with their flexible minimum balance.
| Banks | Minimum Balance For CD Accounts |
|---|---|
| Capital One | No minimum deposit |
| TD Bank | $200 |
| Chase Bank | $1000 |
| Citibank | $500 |
| Goldman Sach | $500 |
| Bank Of America | $1000 |
| PNC Bank | $1000 |
You can always search CDs with low minimum balance on the internet to see more. The above minimum balances do not mean you need the lowest minimum balance to set up a CD. If you are looking to put aside a large sum of money, you can do it with any bank offering a competitive rate.
What Is A Good Amount To Start A CD?
I highly recommend setting a CD account with at least $3000. This is because any account which generates up to 4% annual percentage yield, gets you about $120 yearly. The national average of 0.41% APY on traditional savings, generates only $12.30 a year.
As you can see, saving with CD has its benefits. It is even better, when the amount you are saving is tangible enough for you to see a substantial capital appreciation. Do you agree?
Finally, I recommend you get a certificate of deposit long term. It will help you reap the full benefits of such an account. This is especially, when you are building for an emergency fund or saving to buy a house. The longer the term, the better the interest accrued.
What Is the Best Certificate Of Deposit Rate?
Each bank offers a different interest rate on its CD accounts. As a result, there are a lot of competitive CD rates out there for you to choose from. I have gathered some certificate of deposit rates from a few American banks with no or minimum CD deposits.
| CD Rates | Maturity Dates |
|---|---|
| Capital One | 4% APY interest rates on 1 year online CD accounts. 3.50% APY on 2 years CD. 3.50% APY on a 5 year CD account. |
| TD Bank | Up to 2.75% APY on a 6 month CD account. Up to 3.80% APY on a 9 month CD. Up to 3.51% APY on a 12 month CD. |
| CitiBank | 4% APY on an 18 month CD. 4.35% APY on 8 months CD accounts. 4% APY on a 13 month CD. |
| Goldman Sach | 4.20% APY for 6 months CDs. 4.15% APY for a 7 month CD. 4.30% APY for a 9 month CD. 4% APY for an 11 month CD. 4.15% APY for 13 months CDs. |
Besides the CD rates I mentioned above, there are hundreds of competitive CD rates in the US. You can always search for competitive rates on the internet. Just tailor the search to your city in order to show banks in your city offering good rates.
If you are looking into savings accounts with high interest rates, read 7 Best High Interest Savings Accounts To Beat Inflation.
How Is Certificate Of Deposit Interest Calculated?
Understanding CD interest rates requires you to know what annual percentage yield(APY), compound interest and simple interest are. You have probably come across these terms during elementary arithmetics. If not, it is okay. I will explain them below.
- Annual Percentage Yield- APY: An annual percentage yield is the total interest your certificate of deposit generates annually.
- Simple Interest: A simple interest rate is the interest your CD generates on your money. It could be daily, weekly or monthly.
- Compound Interest: CDs with compound interest generate appreciation on your principal and accrued interest.
The above is the difference between APY and interest rate in a CD. So, what are certificates of deposit paying?
If you put down a $1000 on a CD which pays an APY of 4.50%, your annual percentage yield is $45 per year. You get this by multiplying 4.50% with $1000. This amount is considered the simple interest on the money. If your bank pays a compound interest on your money and its annual percentage yield, then your compound interest at the end of three years will be $141.17.
As a result, your compound interest at the end of three years for $1000 will be $1141.17. This is in contrast to a total of $1135 from a simple interest alone. You can use this U.S Securities and Exchange Commission calculator to get a projected compound interest for amount you want to set up in a CD.
What Happens When A Certificate Of Deposit Matures
When a certificate of deposit matures, a bank expects you to cash out. Otherwise, banks will renew your CD account. This renewal will be done using the same maturity date as the previous term, principal, accrued interest and the bank’s current CD rate.
You can avoid this, by knowing when your CD will mature. It is written on the document you are given after you set up a CD account. Usually, banks will give you a grace period to roll over a CD at maturity or cash it out.
Are Certificate Of Deposit FDIC Insured?
A certificate of deposit is FDIC insured. Just like other types of bank accounts in the US, you will get up to $250,000 in case of bank’s bankruptcy. Do not fret about losing your money though, the United States Of America government will give back your money.
This is as long as the amount at the bankrupted bank is less than $250,000. As I mentioned earlier, you do not have to worry about a bank going bankrupt. American banks rarely go bankrupt due to their large capital, assets and annual revenue.
Benefits Of A Certificate Of Deposit
The benefits of a certificate of deposit account is better than other bank accounts, especially high yield interest savings accounts. While both generate higher than average interest rate on your money, a CD ensures you do not spend the money until maturity date. In a way, it helps you curb your spending habits.
What are other advantages of a CD account?
A CD account has no maintenance fees. You do not have to worry about hidden fees eating into your savings and its accrued interest. With CDs, there is a higher than traditional savings return which is guaranteed. This is where a CD banking account differs from how savings accounts work.
On the whole, knowing how CD works is essential to picking the best one for you. As I previously mentioned, ask your bank for more information on each type of CD account so you do not get one which will not meet your financial goals. With all I have written here, I am confident you will make the right choice.
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