A certificate of deposit (CD) is a type of savings account that allows you to earn a higher rate of interest than a traditional savings account. The "catch" is that you have to leave your money in the CD for a certain amount of time (the term of the CD) or else you'll usually incur a fee for early withdrawal. CDs can provide you with a great option for increasing your savings especially if you select the CD that is right for you.
One type of CD that is increasingly available today is the online CD. Some of the best CD rates are often available through online banks. This is due to the fact that these banks have lower overhead costs than brick-and-mortar banks.
Since CDs are designed to be left alone to grow in peace, there is very little need to go to a bank branch for service. It simply makes sense to purchase CDs from online banks with high interest rates.
A traditional CD is obtained from either a bank branch or an online bank. In contrast, a brokered CD is only available from a financial professional such as a brokerage firm or a financial advisor. In some cases, the brokered CD may offer a higher rate of interest than traditional CDs. This can allow your savings to grow more quickly.
But note that there are fees associated with brokered CDs, which will work against the money your CD earns. Always weigh the costs and benefits of a brokered CD before selecting this option.
The biggest problem that many people face when it comes to saving with CD accounts is that they end up needing to withdraw their money before the CD matures. On a standard CD this incurs a penalty fee. However, there are no-penalty CDs available to prevent this problem.
As the name implies, you can withdraw money from a no-penalty CD without paying a penalty. You'll earn a lower interest rate for the flexibility, however. If you want to earn more interest on your savings but are unsure whether or not you'll need the money in the near future then the no-penalty CD can be a smart choice.
This type of CD is the happy medium between a traditional CD and a no-penalty CD. It allows you to withdraw a certain portion of your deposit as needed without any penalty. The rest, however, cannot be withdrawn. As with the no-penalty CD, this flexibility means the interest rate the bank will pay on a liquid CD isn't as high as they'll pay on a traditional CD.
This type of CD is very similar to a traditional CD. The only difference is that the bank reserves the right to "call back" the CD after a certain period of time. For example, you may get a 5-year CD but the bank reserves the right to terminate the CD after only 3 years. With a callable CD you take the risk that your CD won't earn interest for the full term. For this reason, the rates on callable CDs are often higher than traditional CDs.
Whichever type of CD you choose, it pays to research the different types of CDs and compare CD rates to find the type of CD that is right for you.