How does a certificate of deposit work?

Written by angela atkinson
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How does a certificate of deposit work?
(Steve Woods/,ajajulian/,Mike Johnson/

What is a Certificate of Deposit?

Certificates of Deposits, or CDs, as they're commonly referred to, are very similar to savings accounts, since they are insured and guaranteed funds. One great benefit to a CD, as opposed to a savings account, is that the interest rate is usually significantly higher--so in exchange for keeping your money in a CD account for a specified amount of time, you can earn more interest.

How does a certificate of deposit work?
The longer your CD term, the higher the interest rate rises.

Why Should I Consider a CD?

Owning a CD is a safe and sure way to help your money grow. They are generally a predetermined amount of money, which will be kept by your bank for a preset amount of time. There is also a set interest amount earned by a CD which reaches maturity--meaning the owner doesn't withdraw the money until the agreed upon date. Since there is no risk involved, some people choose to purchase certificates of deposit instead of playing the stock market, even though the return can be smaller.

Another great benefit to owning a CD is that once you've completed your term, you are given choices as to what to do with the money. You can of course withdraw the money and be done with it--or you may choose to reinvest. Some people will reinvest the entire amount, while others may choose to reinvest just the interest. Your financial institution will give you all the details about which plans are available to you.

Tip: Be sure that you are aware of your term and the policies of your bank in regard to your CD. Some banks will automatically reinvest or roll over your money to a new CD if you haven't given them alternative instructions.

How does a certificate of deposit work?
CDs are a safe, sure way to help grow your money.

Are There any Drawbacks to Owning a CD?

There are really very few drawbacks to owning a CD, but here's the bottom line: Putting one's money into a CD means that it stays there for the agreed-upon term. This is only a drawback if you need the money early--in which case the money can be withdrawn, without interest, in most situations. Double-check your paperwork to be sure.

Also, some people prefer to put their money in stocks for the higher interest rate--however, while the interest rate can be higher in stocks, the risk is also significantly increased, as there are no guarantees in the stock market.

Tip: CDs with longer terms generally offer higher interest rates.

How does a certificate of deposit work?
The bank keeps your money for a specified time frame.

How Can I Get a CD?

A certificate of deposit can be purchased through your local bank. It's a very simple process, and can even be done over the phone sometimes, especially if you use your regular bank. There are simple forms to complete, and the banker can generally move the money for you directly from your regular account. Be aware, though, that it certainly doesn't hurt to shop around. You may choose to invest with a different financial institution for a number of reasons, most often because it offers a higher interest rate. Do your homework before handing over your hard earned money!

Tip: Be sure your financial institution is FDIC or NCUA insured before investing!

How does a certificate of deposit work?
Be sure to do your research before you seal the deal!

Bottom Line

CDs are a good way to invest your money to receive guaranteed growth on your funds. Be aware that while the funds are guaranteed, you may find a higher interest rate in other types of investments. Be certain to understand the terms of a CD before purchasing it. Knowledge is power!

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