How to Choose the Right CD for You

What we’ll cover:

• CDs are a great savings tool to help you reach your financial goals, as they typically offer a higher interest rate than traditional savings accounts.
• When choosing a CD option, consider what CD term makes sense for you and your goals.
• Other factors to consider include APY, minimum deposit requirements, withdrawal rules, and FDIC insurance.

A certificate of deposit (CD) can be a great savings tool to help you reach your financial goals. Most CDs offer a higher interest rate for your deposits than a traditional savings account.

They are also generally considered a safe place to park your cash because at the end of the CD term, you get back your principal plus the interest accrued. Also, if you open an account at a FDIC member bank, you’ll have the peace of mind in knowing that your deposits are insured up to the maximum allowable by law (up to $250,000, per depositor, per FDIC-insured bank, per ownership category).

Banks and credit unions offer many different types of CDs. Given the variety of terms and features available, you may be wondering which type of CD account is right for you. Ahead, we’ll go over some key things to consider when choosing a CD.

CD terms and APYs

When it comes to choosing a CD product, first figure out how much you’re comfortable putting away and for how long. This will help you decide on the appropriate CD term. Keep in mind that the money you put into a CD will be tied up for the term. If you take out your deposit before the CD matures, you’ll likely face an early withdrawal penalty – unless it’s a no-penalty CD.

Generally speaking, there are short-term, medium-term, and long-term CDs, and they can range anywhere between a few months (e.g., 3 months) to a few years (e.g., 5 years).

Once you know the timeframe you’re willing to commit to, you’re in a good position to compare interest rates across CD providers. Bear in mind that, long-term CDs typically offer a higher APY than short-term CDs.

To get a sense of whether the CD rates being offered to you are competitive, you can check in with the FDIC — the federal agency provides a weekly update of the national average rates for different types of savings accounts. A little research and comparison shopping can help ensure that you’re getting the best possible deal.

CD features and benefits

There’s more to a CD than its rate and term: CDs come with different features and rules. The key is finding the option that best fits your financial situation and can bring you closer to your goals.

For instance, if your primary goal is to earn a high APY, then a high-yield CD should be added to your list for consideration. High-yield CDs typically offer higher interest rates than regular CDs. But in exchange for better rates, you may have to deposit more money up front when you open the account: High-yield CDs usually come with a higher opening deposit requirement.

On the other hand, if it’s flexibility you’re looking for when it comes to accessing your savings, then you might want to consider a no-penalty CD (NPCD). NPCDs allow you to withdraw your full balance before the end of the CD term without penalty (usually after a short initial waiting period after funding). There’s a tradeoff for this withdrawal flexibility however. NPCDs usually offer lower interest rates than traditional CDs.

Then there are some CDs that allow you to take advantage of rising interest rates. For example, a bump-up CD allows you to request a rate increase for your CD (usually just once) to the current, higher rate offered by your bank. So for instance, if you open a 3-year CD with a 2% APY and a year later, your bank promotes a 3-year CD with a 3.5% APY offer, you can ask your bank to “bump up” your 2% rate to the new 3.5% rate for the rest of your CD term. However, a downside of this type of account is that the initial interest rate offered may be lower than that of traditional CDs.

As you can see, each type of CD has its own benefits and drawbacks. When choosing a CD, look for an account with features that fit your needs, savings goal, and financial situation.

Minimum deposit requirements, withdrawal penalties, and FDIC insurance

Minimum deposit requirements, withdrawal rules, and account fees can vary across CD types and providers. Make sure you understand these rules and requirements before opening an account. And don’t forget about FDIC insurance. Confirm that your CD provider is a member of the FDIC. CDs are FDIC-insured as long as you open your account at a FDIC member bank.

Recap 

When choosing a CD, here are some tips to remember:

• Determine how much money you want to deposit.
• Figure out the length of the term you can commit to.
• Find the right type of CD for your goals.
• Shop around to lock in a competitive rate.
• Make sure your CD is held at an FDIC member bank.