What are Certificate of Deposits?

Certificate of Deposits (CD), also known as Time Deposits, is another form of a Savings account. It's an interest-bearing account that allows customers to earn interest at a higher rate of return, with a fixed APY (Annual Percentage Yield), based on the amount of money customers save. The APY is expressed as a percentage based on 12 months worth of interest that may be paid to the consumers' account as long as consumers have a 12 month increment term and the interest rate is what's compounded daily that's being accrued on the customers' balance in the account on a daily, monthly, basis etc. If customers leave their money in a CD for 12 months then they can basically earn interest on top of interest on the account. Example: let's say you have a 12 month CD and your interest rate is 4.00% APY and 4.00 interest rate, and you deposited $100,000.00, then you yill earn about $333.33 each month and about $4,000.00 for the year just on the interest rate. Hence you will be able to earn an extra $160.00 with the APY, so the total will be $4,160.00. In this example it's basically earning interest off of interest as long as you do not withdrawal from your CD.

In addition, customers choose to have either a short-term or a long-term timeframe to invest their money--basically the length of time their funds will remain in the account. (Short-term means that customers will leave their money in this account for less than 12 months, and if it's long-term, then customers will leave their money in this account for more than 12 months).

Here are some reasons customers may choose a short-term CD:

  • purchase a car
  • use interest to pay bills
  • saving for vacation
  • for personal events

Here are some reasons customers may choose a long-term CD:

  • Weddings
  • Anniversary
  • College Tuition
  • Purchase a home
  • For Retirement
  • To Leave an Inhertiance
  • Start a business venture

What are Stipulations on CD Accounts?

  • You are unable to withdrawal without penalty (certain requirements apply)
  • You are required to report interest income on your taxes (depending on when interest was paid)
  • You are able to withdrawal during maturity date without penalty
  • An ATM/debit card cannot be linked to a CD
  • You can only withdrawal money either by Telephone (to have it issued in the mail), funds transfer (from a CD to another internal deposit account, or at a branch
  • Most banks will not allow you to add money to a CD until its maturity date or when customers are initially opening an account

When choosing to open a CD, customers will have to leave their money in a CD until its maturity date. The maturity date is the date customers can withdrawal their money, including interest earned, without penalty and surcharges. If customers withdrawal too early usually banks can charge between 1-3 percent of the withdrawal amount and surcharges, or banks may charge consumers' current interest rate (that they are currently receiving on the CD) and on the remaining term of the CD from the withdrawal amount. Let me give you an example below.

You deposited $100.000.00 in to a CD account on 01/01/2010 and your maturity date is not until 06/01/2010. You decided to withdrawal $3000.00 for an emergency, so since you need that amount, your bank will charge you 1% of the withdrawal amount, and a surcharge for processing of $35.00. (You may choose to have the percentage either withdrawn from the amount remaining in your account including interest that has accrued or from the amount of the actual withdrawal). Overall that leaves $97,000.00 in the CD, there's a $30.00 penalty for early withdrawal (because customer is withdrawing before the maturity date) and a $25.00 surcharge for processing, so the customer receives $2,945.00 from the withdrawal. That's why it's important to leave the money stationery until the maturity date. You can avoid penalities, and you may enjoy the fruits of interests that's being earned on your CD. In addition only deposit the amount you actually want to invest so later you'll not need this money while it's earning its investment.


How to Shop for the Best Certificate of Deposit rates

What consumers normally do is shop around at different financial institutions, credit unions, and Savings banks until they have found the best interest rate and APY they would earn as a return on their investment. Their investment is the amount of money they would be depositing in to a CD and the return on their investment would be the amount of money the banks would pay consumers interest in their deposit accounts. This is reciprocal, whatever customers deposit in to their bank, the bank pays them back in interest. Always remember that when banks quote CD rates, they are subject to change. Sometimes the rates can either change weekly or daily. That's why it's important for consumers to lock-in their money at an attractive rate. What is really lucrative about having a CD is that customers may select the interest rate they would like to receive on their money deposited and they may also choose the term of how long they would like their money in the account. CD accounts have a term between 30 days up to 5 years (that's about 1825 days). Do you remember the difference between short term and long term? Well consumers may choose whether or not they want a short-term CD or a long-term CD depending on their life's circumstance(s).

Shopping around for CD rates is very convenient, and the best way to shop around for CDs is by reading offers in the newspapers, direct mail, television, and online. When searching through these articles, consumers may find very attractive rates by redeeming promotional offers to obtain higher interest rates. Listed below are some main questions you should ask your financial institution regarding CDs:

  • If I were to have more than one account open with your bank, will I earn a higher rate on a CD?
  • What are the current CD terms your bank has to offer?
  • How much is the minimum amount to deposit in to a CD account?
  • What is the interest rate and the Annual Percentage Yield?
  • What are the penalties for early withdrawal?
  • How will my interest be compounded? (Is it monthly, quarterly, semi-annually, or yearly)
  • Are there any CD special rates that requires a minimum deposit?
  • What are your Jumbo CD rates?
  • Once my CD matures, if I currently have a CD special, will my account reset to your normal rates or will it default to the CD special rates?
  • Does your bank match rates with other banks to win my business

These are some great questions to ask your personal banker when inquiring about opening a CD account. When asking these questions, make sure you are taking notes so you may compare what other banks have to offer. Make sure you use your best judgment based on how much you want to deposit, and how long you want to keep your money in this account.

What are Jumbo CD Rates?

Jumbo CDs is based on the amount consumers deposit in to their account. Normally the deposit amount required is $100,000 or more in order to qualify for a higher rate and for this CD type. Anytime consumers inquire about Jumbo CDs, representatives should know exactly what and how to quote these rates. Send emailable gift cards

The Difference between Savings and Certificate of Deposits (CD)s

If customers decide to receive a Savings account,there's no term and the rates are not locked-in. The rates are variable, so whatever the market rate the banks offer, then that's the rate customers will receive on their account. However, for CD, rates are fixed, and whatever term and rate customers choose (based on what the financial institution offers and the current market rate) then that's what customers will receive.

The difference between a Savings account and a CD account is that with a Savings account there are less penalties from a withdrawal than it is with a CD. Remember when withdrawing money from a Savings account, there are account restrictions of how many withdrawals you can make without receiving the letter from your bank about exceeding the Regulation D Reserve Requirements and excessive withdrawal fees because of the amount of withdrawals customers made within that statement cycle. In addition, you can make transactions against the account too with an ATM card, at a point of sale, at a branch, at an ATM, and ACH transactions with customers' routing number and account number by telephone.

A CD account basically helps customers save money but at a higher rate of return. What normally happens is customers look for attractive rates so they can earn a lot of money from interest the banks gives them. On the other hand, there are certain restrictions that apply. Customers can neither make purchases with a CD account nor withdrawal money from an ATM with this account. However, there are only two methods that customers can make withdrawals from a CD: one is by telephone and one is by going inside the banking center. Anytime customers are withdrawing money from a CD there are also penalties involved such as an early withdrawal fee (also known as a penalty percentage) and usually a surcharge. Some banks charge a fee based on the term (length of time) of the CD and the time frame the account has been opened. Overall it's best to leave money in a CD without having any intention to withdrawal the money. You definitely don't want to defeat its purpose.

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