CDs pay a higher rate of interest on monies you deposit as savings than what you receive when you deposit in a regular savings account. The stipulation is, however, that you have to keep your money in the CD for a specified amount of time, from 3 months up to 5 years—the longer the better–, and if you withdraw your money early you will pay a penalty. Still, CDs are a better way to make money on your savings than keeping your money sitting in a low-interest-rate savings account, and CDs will be protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.
You can buy a CD from your bank or from a broker. You will want to look for the highest interest rate for the least amount of time. Brokers can offer a higher rate of interest, generally, than banks.
Still, you should always buy wisely. First, get in writing some important terms:
- The rate of interest,
- The date of maturation,
- The early withdrawal penalty fee.
Also make sure you have checked on a couple things.
- Make sure the FDIC is covering you, especially if you purchase through a broker.
- Make sure you understand whether or not your CD has a call feature. A call feature means the bank can terminate the CD early. You would still receive all your principal and interest earned to date, but you will not receive what you might have had at the maturation date.
- Make sure you ask, when a broker CD has no penalty for early withdrawal, exactly what draw backs you could still experience. Brokers, while they hold the CD, can trade and swap the CD with different banks. Some of these banks may have higher interest rates, some may have lower interest rates. If you happen to withdraw at an early date while a bank that offers lower interest holds your CD, you could actually lose to the point where you will have even less principal.