Compare and find the best CD rates at YoBucko. YoBucko makes it easy to find savings, CD, money market, and deposit interest rates. Just pick from our menu of savings products, shop around and find the best CD for you. To help you make a smarter savings decision, here are some answers to common questions about Certificates of Deposit, or CDs.

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What is a certificate of deposit (CD)?

Investors searching for relatively low-risk investments often turn to certificates of deposit (CDs). A CD is a special type of deposit account with a bank or thrift institution that typically offers a higher rate of interest than a regular savings account. Unlike other investments, CDs offer federal deposit insurance up to $250,000.

How do CDs work?

When you buy a CD, you invest a fixed amount of money for a fixed period of time (typically, between one month and five years.) In return, the bank that issued the CD will pay you interest at regular intervals. When you cash in a CD or redeem your CD at maturity, you receive the money you originally paid plus any interest that has accumulated (but has not been paid to you). If you redeem your CD before its maturity date, you may have to pay a penalty called an “early withdrawal” penalty or give up some of the interest you earned.

Where can I buy a CD?

Most people buy CDs through local banks and credit unions, but today you can also buy CDs through brokerage firms. There are two types of brokerage firms that sell CDs: traditional stock brokerage firms and firms that specialize in selling CDs, known as “deposit brokers”. Sometimes, these brokers can negotiate higher interest rates on CDs by promising to bring more deposits to a particular FDIC-insured financial institution. The deposit brokers then offer these “brokered CDs” to their clients.

What types of CDs are available?

In the past, CDs paid fixed interest rates until they reached maturity. Today, they can get a little more complicated. You now have the option to buy variable rate CDs, long-term CDs, and CDs with different types of redemption features. For example, there are long-term, high-yield CDs with “call” features, that give the bank the option to call (i.e. terminate) the CD after a year or some other time period. So if you buy a CD with a call feature that earns a lot of interest, the bank may “call” it if interest rates go down because it costs them more to pay you a high amount. Similarly, if interest rates go up, the bank is getting a better deal and will probably not “call” your CD because you are locked into a lower rate than you would be if you bought it at the current interest rate. Either way, make sure to know what type of CD you are buying before you purchase. Ask your bank or broker to make sure you are aware of the risks and features of the CD. Read all disclosures (and fine print) and ask questions. Here are some tips for helping you make a smart CD buying decision.

What Should I Look Out for When Buying a CD?

Beware of Abnormally High Interest Rates – If a CD interest rate seems too good to be true, be careful. Make sure that the CD you are buying is from a federally insured financial institution. If it is not, it may just be a marketing trick to get you to open an account with an institution that is not legitimate.

Beware of Marketing Schemes – Sometimes, you will see very high interest rates advertised and when you call to check the rate, the company tells you to come in to their office to discuss the details further. When you go in to explore and speak with the company, you may find out that the high rate is only for the first $500 or for a set amount of time – not for the entire balance.

Beware of Up Selling – Another trick is to tell customers that the bank or financial institution will only pay part of the rate, say 3% of a 6% advertised rate but the salesman offers you another investment to make up the difference. Beware of these situations. If you read one thing and hear another, you may be getting the run around and buying something that is good for a sales person’s personal bank account and is really bad for you.

What is CD Laddering?

CD laddering is a strategy where you buy multiple CDs over different time periods. Some people use this strategy because they want to maximize earning, but need their money to be available over time and can’t afford to put all of their funds in a long-term investment. For example, say you have $10,000 and will need $5,000 in 2 years and $5,000 in 5 years. While a 5-year CD pays a higher interest rate, you can’t afford to put all of your cash into the 5-year CD. In this instance, you could use a CD laddering strategy and staggering the maturities of your CDs into two buckets. The first $5,000 could go into the long-term, 5-year CD, and the remaining $5,000 could go into another, lower-yielding, 2-year CD. Just make sure the money you put into CDs is money you can afford to stash away for a while so you can avoid paying penalties for early withdrawal if you need the money sooner.

What Should I Consider When Buying a Brokered CD?

When you are buying a brokered CD, identify the issuer. Because FDIC insurance only covers $250,000 for each depositor in each financial institution, you need to know who issued the CD to make sure you are covered in case the financial institution fails. Make sure you know where the broker plans to deposit your funds. Not every company with a bank-sounding name is a bank or is FDIC-insured. You want to make sure the place where you deposit your funds is FDIC-insured and you will need to know the name of the issuer to find out. Click here to see if your CD issuer is FDIC-insured or call FDIC toll-free at 1(877) 275-3342.

Also, make sure to ask your broker what record-keeping procedures they have in place to assure you are covered by FDIC insurance, and also ask how they will title your account. For example, if the account is held in your brokers name, and not in your name, you want to make sure that it is indicated that the funds are being held on your behalf. Basically, you want to make sure your name is listed somewhere in the title of the account and that the bank understands that you want this information on file with the issuer. If you don’t you may not be covered by FDIC-insurance so make sure to ask in advance.

What Should I do if I Can’t Get Answers from My Broker?

Take your business somewhere else. If you feel like your broker doesn’t understand your questions, or acts very hesitant to answer your questions, pack up your money bags and find another place to do business. There are other companies out there that want your business and are willing, able and ready to answer your questions quickly and accurately. When it comes down to it, it’s your money, and if you don’t feel like you are working with straight-shooters, then don’t work with them. Life is too short and money is too scarce to do business with shady people.

What are Callable CDs?

Callable CDs are CDs that give banks the right to terminate your CD after a set amount of time, but you don’t get the same right. So if interest rates are moving in your favor (down), the bank may terminate your CD. But if interest rates rise, you won’t have the same flexibility. At the end of the day, make sure you understand the call features associated with your CD and understand the risks of buying a “callable” CD before doing it. If you currently own a callable CD or if your bank redeems your CD, you should still receive the full amount of your original deposit plus any unpaid interest.

What is a CD maturity?

Make sure you understand the difference between call features and maturity dates. Maturity dates are the dates when your CD contract ends and you receive your original deposit plus unpaid or accrued interest. Make sure that your broker or the person you purchase the CD from explains all of the features of your CD and that you understand when you will be paid and what call features are attached to your contract.

How do I make Money on CDs?

You make money on CDs as interest accumulates over time. You should get a disclosure statement when you buy a CD that tells you a.) the interest rate b.) whether the interest rate is fixed or variable c.) interest payment frequency d.) maturity date and; e.) how you will be paid. You will want to know these things before you buy but make sure you confirm them once you receive your documentation. So, here is an example of how you make money:

Say you invest $10,000 into a 5% CD that pays interest annually. Each year, you should receive a check or deposit (depending on your payment method) for $500 that you can save, spend or reinvest. So, over a 5-year period, you should receive a total of $2,500 in interest payments (5 years x 5% interest per year).

What is a Variable Interest Rate CD?

Variable interest rate CDs are CDs that do not pay a fixed interest rate. Instead, they pay an interest rate that fluctuates based on some other rate (for example, LIBOR or PRIME rates) and pays a premium or discount on top of that rate. So, for example, assume you buy a 5-year variable-rate CD that fluctuates based on LIBOR rates. If LIBOR rates rise in the next year, you would earn more interest. If they go down, you would earn less interest. Some variable-rate CDs have a “multi-step” features or “bonus-rate” structure in which interest rates fluctuate on a pre-set schedule. Before you purchase a variable-rate CD, make sure you understand the risks and features of the CD and know what underlying index or price determines the interest you will earn.

Why Do Banks Charge Penalties for Early Withdrawal?

Banks charge customers penalties for withdrawing funds from a CD for a few reasons. Here are two. First, banks like certainty and when a customer signs up for a product like a CD that has contractual agreements tied to it, it costs them money and causes uncertainty for their cash flow. As a way to “encourage” customers to abide by their contract, they charge penalty fees for breaking the terms of the agreement. Next, banks are in the business of taking in deposits and lending out money. If you need the money before they thought you needed it, they may have a loan outstanding and need to find other money to make up the difference.

How Can I Avoid Early Withdrawal Penalties?

In many cases, you can’t avoid early withdrawal penalties, but there are a couple things that may allow you to avoid early withdrawal penalties. Here is an example:

Some brokered CDs are issued in the name of your deposit broker or a “custodian.” Some brokers will advertise that they don’t charge penalties for early withdrawal. To avoid the penalties, the broker can try to resell the CD for you on the open market before maturity. If interest rates have gone up since you purchased your CD, you may lose money on your original investment. Why? Because buyers of your CD can buy other CDs today at higher rates and wouldn’t want your old CDs with lower rates. The only way they would buy your CD is if you gave a discount off of the face value. For more information about prices and interest rates, read this article.

What is a Death Benefit Feature?

Some CDs offer a death benefit feature so that if you pass away before your CD matures, your heirs can redeem the CD without paying a penalty.

The Bottom Line

When you are buying a CD, you should ask yourself a simple question: does this investment make sense for me in my current situation? A CD earns more interest than most savings accounts but is similar to a bond in that it has a maturity date and pays a fixed amount of interest (in most cases). Make sure you understand the features, benefits, maturity, and interest rates of your CDs and also make sure the money you put in CDs is money you can afford to stash away for a while.

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