How Does a Certificate of Deposit Work? (CDs) (2024)

Have you been looking for a low-risk way to save money that earns more than a traditional savings account? Certificate of Deposit (CD) accounts are a popular choice for savers looking to earn interest while keeping their money safe.

But what are they, how do CDs work, and are they safe? Moreover, is there more than one type of CD? And how much can you earn in interest? Here’s everything you need to know about how CDs work.

What is a Certificate of Deposit?

A CD is a savings product offered by banks and creditunions. It often provides higher interest rates than regular savings accounts.With a CD, you keep a specific amount of money in the account for apredetermined period. The predetermined period that money stays in a CD iscalled the term.

CDs are available in various terms, ranging from a few months to several years. The longer the term of the CD, the more you will typically receive at the end. However, you may not be able to access your money during the term of the CD without incurring penalties.

Because of the early withdrawal penalties, CDs aren’t the best fit for items likeemergency funds. And, since their terms are short, they are not ideal for long-term goals likeretirement. However, CDs can be great for short-term savings needs like events, vacations, ordown payments.

CDs can be a good option if you want a low-risk, predictable account to grow your savings over a set period. However, it's vital to consider the terms and conditions of the CD carefully. Look at the annual percentage yield (APY), term length, and potential penalties before you choose

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How Do CDs Work, Rates/Interest?

When you open a CD, you deposit a lump sum of money into the account. The interest rate on the CD is typically fixed for the entire term.

The earnings is called interest. Interest is usually paid or credited into the account monthly,quarterly, semi-annually, or annually. When you get paid is based on your CD's conditions.

Are CDs Safe?

Because they are FDIC-insured, CDs are considered low-risk.This means that even if the bank or credit union fails, your money will be protected.

CDs are backed by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions.With CDs, your deposits and credited interest are protected up to the insured limit.

The FDIC insures accounts up to $250,000 per account ownership category_[1]. Likewise, the NCUA insures up to $250,000 per account holder_[2].

Recommended:Are Community Banks Insured by FDIC?

Different Types of CDs & How They Work

When saving in a CD, understand that not all CDs are created equal. Banks and credit unions offer various types of CDs, each with its own set of features and benefits. Let’s get to know the different types of CDs available.

Term CDs

Term CDs are the most straightforward type of certificate of deposit, where you deposit funds for a fixed period, usually ranging from three months to five years. During this time, your money earns interest at a predetermined rate. You cannot withdraw your funds without penalty until the CD matures.

Term CDs offer predictable returns and are suitable for those looking to save for short to medium-term goals.

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Option CDs

Option CDs provide more flexibility than traditional CDs by allowing you to adjust the earning rate or withdraw funds penalty-free before the CD matures. This option gives you greater control over your savings.

Option CDs can be beneficial if you expect changes in rates or may need access to your funds.

Climbing Rate CDs

Climbing Rate CDs or Interval CDs offer a gradually increasing interest rate over the CD term. This allows you to benefit from rising rates. These CDs typically start with a lower interest rate that increases at regular intervals, providing the potential for higher returns over time.

Climbing Rate CDs are suitable if you want long-term growth and protection against inflation.

Guaranteed Growth CDs

Guaranteed Growth CDs ensure a fixed rate of return over the CD term. This offers an added layer of stability and predictability. With this type of CD, you know exactly how much interest you will earn throughout the term.

Guaranteed Growth CDs are a great option for those who prioritize safety over returns.

Birthday Certificate of Deposit

Birthday CDs offer a unique feature that allows you to make additional deposits on the CD's anniversary date. This feature provides opportunities for more savings. It also allows you to take advantage of any extra funds you may have throughout the CD term.

Birthday CDs offer added flexibility. They can help you boost your savings over time while still enjoying the security of a traditional CD.

Start Saving Money for Your Future with Certificates of deposit at Centier Bank

CDs are powerful tools for secure savings and financial growth. By understanding how CDs work and exploring the diverse options, you can harness their potential to achieve your financial goals.

Whether you want a traditional term CD or something more outside the box, being informed will help you make the best decision. Your journey to financial success begins here.

To unlock a world of possibilities, explore Centier Bank's CD options and start saving today. Take control of your financial future and start saving with confidence.

Sources:

[1] https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/

[2] https://ncua.gov/newsroom/press-release/2020/deposits-are-safe-federally-insured-credit-unions

FAQs

How Does a Certificate of Deposit Work? (CDs)? ›

How CDs work. CDs offer a guaranteed return when you keep your money in the account for a set term. Let's say you find a bank that offers a one-year CD with a 4 percent APY. As long as you keep the funds in the CD for the duration of the one-year term, you're guaranteed to earn a 4 percent yield on your money.

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How much does a $1000 CD make in a year? ›

That all said, here's how much a $1,000 CD will make in a year, based on four possible interest rate scenarios: At 6.00%: $60 (for a total of $1,060 total after one year) At 5.75%: $57.50 (for a total of $1,057.50 total after one year)

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How much does a $5000 CD make in a year? ›

How much interest would you make on a $5,000 CD? We estimate that a $5,000 CD deposit can make roughly $25 to $275 in interest after one year. In comparison, a $10,000 CD deposit makes around $50 to $550 in interest after a year, depending on the bank.

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What happens if you put $500 in a CD for 5 years? ›

For example, if you deposit $500 in a five-year CD that earns a 5.15% APY, your balance by the end of five years will be $642.71, earning you $142.71 in interest. However, if the interest rate is 3.25%, your earnings will only be $586.71, a difference of $56 in interest earnings.

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How does a CD work for dummies? ›

Certificates of deposit (CDs) are different from other types of accounts offered by banks and credit unions. They typically pay higher interest rates but also require that you leave your money on deposit for an agreed-upon period of time. Otherwise, you'll usually have to pay an early withdrawal penalty.

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What is the biggest negative of putting your money in a CD? ›

Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.

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Do you pay taxes on CDs? ›

Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

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Can you lose money on a 1 year CD? ›

Losing money in a CD is highly unlikely. However, it's not impossible. If you're thinking about opening one, read the fine print about early withdrawal penalties, and be sure to compare more flexible options that don't have a maturity date. And even if you decide to open a CD, don't set it and forget it.

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Does a CD ever lose value? ›

The risk of having a CD is very low. Unlike how the stock market or a Roth IRA can lose money, you typically cannot lose money in a CD.

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How much does a $10,000 CD make in a year? ›

Earnings on a $10,000 CD Over Different Terms

Term Length	Average APY	Interest earned on $10,000 at maturity
1 year	2.60%	$263.12
18 months	2.22%	$338.29
2 years	2.08%	$424.40
3 years	1.94%	$598.77

3 more rows

6 days ago

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How much money should I start a CD with? ›

Minimum deposits vary based on account and financial institution, but a required deposit of around $500 to $1,000 is typical when opening a CD. However, it is possible to find CDs with no minimum deposit requirement.

Do CD accounts pay monthly? ›

That's up to each issuer. In practice, however, most CDs compound either daily or monthly. The more frequent the compounding, the more interest your interest will earn. The frequency with which your CD compounds is reflected in the annual percentage yield (APY) that the CD's issuer promises you when you buy a CD.