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What are Certificates of Deposts?

Jan 7, 2008
Many consumers have found that putting money into CD's (certificate of deposit) accounts is a good way to earn additional interest over regular savings accounts. Just like the regular savings account that most of us are familiar with, money that you put into a CD will earn interest, and usually it will earn more interest than a simple savings account.

One major difference between a regular savings account and a CD is that the money that you put into a CD has to remain in the bank or credit union for a specified amount of time in order to earn the full amount of interest. You can take the money out of a CD but you will have to pay a penalty.

The basic rule of thumb for CD's is to not use money that you believe you will need to use before the maturity date. In other words, you should only buy into a CD if you can afford to leave the money alone for the amount of time required.

All certificates of deposit will have a maturity date. This is the date when you can withdraw the money without having to pay a penalty. The length of time for CD's varies, so make sure you understand what you are buying.

In the event you should need to cash out the CD before it matures, most banks will charge an early-withdrawal fee. These fees are usually equal to about three to six month's of interest but, again, this can vary, so check with the bank.

Generally, most CD's mature in three months to five years, although 10- and 20-year CD's are also available. The amount of interest offered will vary depending on the length of time of the CD.

Consumers should know that CD's are protected under the Federal Deposit Insurance Corporation (FDIC) as long as they were issued through a bank. This protects consumers from loss should the bank go out of business.

Most certificates of deposit will earn compounded interest. Compounded interest means that the interest your money earns is added to the total amount of the CD so that the next time interest is calculated and added, you will earn even more.

For those who have extra cash and can afford to invest it and leave it alone until maturity date arrives, certificates of deposit are a good idea. They are a safe and effective means of earning interest on your money. They may not be as exciting as some other forms of investments, but they allow the owner to sleep at night, knowing their investment is not going to vanish overnight.

CD's can be great gift ideas for grandchildren and other members of the family. If they are bought early enough, they can be used to help fund future education needs as well. Because they can be purchased for relatively small amounts of cash, they are often affordable to many families that otherwise might not be able to invest. Most banks and credit unions will have literature that you can read to learn much more about CD's and how they work.
About the Author
Peter Kenny is a writer for The Thrifty Scot, please visit us at Compare Mortgages and Debt Loan
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