Common questions about Certificates of Deposit

A certificate of deposit is a time deposit. CD’s are a risk free investment option that is offered by many banks, credit unions and even other financial institutions. CD’s are also insured and hence you need not worry about losing out on your investment. They are insured by the FDIC when offered by banks and by the NCUA when offered by the credit unions. The thing about a CD is that it is offered for a fixed term and you cannot have access to the funds during that period. The terms of CD’s range from 3 months, 6 months or even 6 years at times. You will get a much higher interest rate than a savings bank account because you are locking up your money for a long period of time and the financial institution is free to do whatever it wants with the money during that time. We shall now discuss a few common questions that might arise with regard to certificates of deposit.

What is the maturity date of the CD?

Always check the maturity date of the CD that is handed out to you. People always make the mistake of not checking the maturity date and end up getting into trouble later on when they realize that their money is locked up and they do not have access to it. If you want to withdraw the money during the fixed period, you will end up paying a penalty which will eat into your interest accumulation.

Details about the call features – are there any?

Inquire about the call periods that your bank has set on your CD. The bank will have rights to call or revoke your CD any time during the maturity period if it is a callable CD. If the interest rates of the market fall, the bank can call the CD. In such a case you will receive your money plus the interest accrued but you will end up having to reinvest your money somewhere else and your interest rates will be much lower than what your original CD had.

Is it a fixed or variable interest rate?

The interest rates of CD’s are normally kept constant throughout the tenure of the CD. But there are a few variables CD’s whose interest rates will change over time. These can include step up CD’s or bump up CD’s which will increase their interest rates at certain time periods. You need to find out what these periods are and what the increments are going to be like.

Is the interest rate sufficient for the full term?

It is not usually enough for the entire term. You will see a lot of advertisements claiming that the interest rate is way higher than the current market rates. But when you go to find out, you will realize that the interest rate applies only on the first $1000. Or it may be that the interest rate applies only for a certain time period and then later on the interest rate will be reduced. Be sure of what the rates are and more importantly find out whether it is for the full term or just for a short period. Write down the rates and get it in a written contract. Word of mouth will never do for a certificate of deposit.

And lastly find out everything about the penalties involved in removing your money in advance from an account.