Certificates Of Deposit: Tips For Savers

A certificate of deposit (CD) might be worth your consideration if you have some money you can afford to be without for a specified period of time.

There are many different kinds of CDs, so make sure you fully understand all of its terms before you purchase a CD. Take the time to read the disclosure statements, including any fine print.

The best way is to educate yourself about your options because the highest yielding CD may not be the right one for you. Click here to check out CD rates.

Here are questions to ask before you invest:

1) When Does The CD Mature?

Before you buy a CD, ask to see the maturity date in writing. Confirm the maturity dates for your CDs so that you won’t get a shock later on should you tie up your money for five, ten, or even twenty years.

2) Which Bank Or Thrift Issued Your CD?

This is a very important question to ask especially if you buy a CD through a deposit broker. Because federal deposit insurance is limited to a total aggregate amount of $250,000 for each depositor in each bank or thrift institution, it is essential that you know which bank or thrift issued your CD. Make sure the FDIC insures the bank that issues your CD. If you are buying your CD through a brokerage firm, make sure the bank that issued the CD to the broker has FDIC insurance. For more information about federal deposit insurance, read the FDIC’s publication Your Insured Deposits or call the FDIC’s Central Call Center at (877) 275-3342 or (877) ASK-FDIC.

3) Does The CD Have Any Call Features?

If the CD is callable, it means the issuing bank has the right to terminate or call the CD after a certain period of time, but you do not have the same right. If the bank calls or terminates your CD, you should receive the full amount of your original deposit plus any unpaid accrued interest.

4) Know The Difference Between Call Features And Maturity

A “federally insured one-year non-callable” CD does not mean it matures in one year. If in doubt, ask the sales representative at your bank or brokerage firm to explain the CD’s call features and to confirm when the maturity date.

5) Confirm The Interest Rate You’ll Get And How You Will Be Paid

You should get a disclosure document that tells you how much interest rate you’ll get on your CD and whether the rate is fixed or variable. Ask how often the bank pays out the interest, whether on a monthly or semi-annual basis. And confirm how you’ll be paid – for example, by check or by an electronic transfer of funds.

6) Does The Interest Rate Ever Change?

If you’re thinking of investing in a variable-rate CD, make sure you understand when and how the rate can change. Some variable-rate CDs have a “multi-step” or “bonus rate” feature whereby the interest rates increase or decrease over time according to a pre-determined schedule. Other variable-rate CDs pay interest rates that track the performance of a specified market index, such as the S &P 500 index or the Dow Jones Industrial Average.

7) Are There Any Penalties For Early Withdrawal?

US federal law requires a minimum penalty of seven days interest for early withdrawal on any account classified as a time deposit. Since the law doesn’t stipulate a maximum penalty, banks have the freedom to charge much more. For example, some banks may charge 180 days interest for early withdrawal on a 12-month CD. Let’s say you purchased a 12-month CD and decided to withdraw after three months. You would still have to pay six-months of interest even though you’ve only earned three, meaning you’ll have to dig into the principal you paid for the CD to pay for interest you haven’t even earned.

8) Ask If Your Broker Can Sell Your CD

Deposit brokers may advertise no penalties for early withdrawal as they may try to resell the CD for you if you want to redeem it before maturity. If interest rates have gone down since you bought your CD and demand is high, the CD may be sold for a profit. However, if interest rates have risen, there may be less demand for your lower-yielding CD. The result of this is that your CD may have to be sold at a lower price, and thus you could lose some of the principal which you put into the CD.