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What is a CD (Certificate of Deposit)?

Oct 26, 2007
The term CD stands for Certificate of Deposit. A CD is simply a short- to medium-length investment. They are FDIC insured and are available for purchase at banks, credit unions, and savings and loans. CD's are a good way for some consumers to get higher interest rates on their money, but there are some issues associated with them that consumers should know about before signing up for one.

In basic terms, CD's operate like this: You will put a certain amount of money into the institution for a certain amount of time. The institution will use this money for various purposes. In exchange for investing your money with them, you are promised a predetermined interest rate on the money, as well as having your money protected by the FDIC. The FDIC is the Federal Deposit Insurance Corporation, and it protects your money in case the bank or savings and loan fails.

Buying CD's is a good, safe way to invest money but it does have some drawbacks. For one, once you buy the CD you are not allowed to withdraw that money without incurring a penalty fee. This is for withdrawals that take place before the CD matures. Another drawback can be the length of time that a CD takes before it matures. This length of time can vary greatly but it is common for many CD's to mature between 1 year and 5 years. There are shorter term CD's as well, and there are longer term CD's, some maturing at 10 to 20 years. It is important to understand the maturity length before you sign up for one, and to understand that this money will be tied up in the CD for that length of time.

A certificate of deposit is very useful for certain people. Because it is a very low risk investment it can be especially useful for elderly people and for young people who want to get started with their savings. It is also a good way to invest for those people who have limited amounts of money that they can invest.

All consumers should make sure that they are getting their CD from an FDIC-back source. Normally, you will know this if you are buying the CD on your own at your bank, but if you are using a broker to buy the CD for you, make certain that you know which bank is issuing the certificate of deposit, and that the bank is insured.

Before you buy your CD, sit down with the bank and find out how the interest rate works. You may be getting a fixed rate on your CD or you may be getting a variable rate. It is important to know which is being attached to your CD as this will affect your profit. If you are buying a jumbo CD (a CD that is over $100,000) make sure you talk about the issue of protection. The FDIC only backs up to this amount and you will want to know what the financial institution can do to help protect the money you invest above this limit.

Lastly, rates for CD vary so you may want to shop around to find the institution that offers the best rates for your certificate of deposit.
About the Author
Peter Kenny is a writer for The Thrifty Scot, please visit us at Compare Saving Accounts and Checking Account
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