Home Financial Well-Being Saving Money What is a Certificate of Deposit (CD)?

What is a Certificate of Deposit (CD)?

A certificate of deposit (CD) is a savings tool offered by banks and credit unions that allows you to earn a fixed interest rate over a specified period. In this article, I will share the pros and cons of opening a CD and where you can find the best rates.

A generally safe investment

Like traditional checking and savings accounts, CDs are insured by the Federal Deposit Insurance Corporation (FDIC). This means that even if your bank failed – like the recent Silicon Valley Bank – your deposited principal amount would be protected up to the FDIC insurance limit.

Higher interest rates than traditional savings

One of the benefits of a CD is that they almost always offer a higher interest rate than traditional savings accounts. According to the latest information published by the FDIC, the average national interest rate on a traditional savings account is 0.37%. In comparison, the average rate on a 3-month CD is 0.67%. Keep in mind though, that this is only the national average. There are many banks currently offering much higher rates for CDs. Keep reading to find out more.

Your money may be held up until the end of the CD term

Unlike traditional savings accounts that allow you to withdraw money up to 6 times a month, you may be unable to take money out of your CD. CDs typically have a fixed term from a few months to several years, and there may be penalties for early withdrawal before the term expires. Some banks offer No Penalty CDs, although these are at a lower rate.

Where to Find the Best CD Rates in April 2023

As of the date of this article, the following banks are offering above-average CD rates.

BankMinimum DepositCD TermAPY
Ally Bank None18 month4.80%
Ally Bank – No Penalty CDNone11 month4.25%
American Express National BankNone12 month4.25%
Capital OneNone12 month4.15%
Rates as of 04/16/2023

Summary

CDs are a great savings tool to add to your financial portfolio. They are a good alternative to savings strategies such as “envelope stuffing,” which requires you to keep cash in your home. Opening a CD is an easy way to save for short- or medium-term goals, such as a down payment on a home, a wedding, or a vacation. However, before putting your money into any CD, it is important to carefully review the interest rate, term, and potential penalties, before deciding which CD is best for you.

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