Find out how do CDs work, how do certificates of deposits work, and how do CDs work at banks and credit unions.

How Do CDs Work?

CDs (certificates of deposit) are a type of investment that earns interest. While some people might simply use a savings account to earn interest, CDs will often feature a higher rate. Even though your money might not grow as quickly as it could in the stock market, CDs are a safer investment avenue than stocks, bonds, or mutual funds.

What is a CD?

A certificate of deposit is a type of savings account that accrues interest on a fixed deposit for a fixed amount of time. It’s different from a standard savings account in that you usually can’t add to or withdraw from the CD without penalty until the CD matures (i.e., the end of the term assigned to that CD). Also, unlike most regular savings accounts, which can have fluctuating interest rates, CDs earn the same rate throughout the term.

How does a certificate of deposit work?

Most CDs have terms ranging from three months to five years. Usually, if you choose a longer term (which also means you won’t have access to your money for longer without paying a penalty), you’ll earn a higher rate. However, early-withdrawal penalties could also be higher for those longer-term CDs.

In essence, with a CD, you and the financial institution agree that they’ll pay you a fair amount of interest on the sum you deposit, providing you don’t touch it for the agreed-on period. Once the time is up, you get your initial deposit back plus the interest the financial institution owes you. Because these accounts are insured by the National Credit Union Administration (NCUA) up to a certain dollar amount, your CDs are safer investments than stocks or bonds.

Certificate of deposit pros and cons

CDs are great for some situations but might not be the best idea for others. If you’re looking for a higher rate than a savings or money market account might offer, if you want a predictable return, if you want an incentive to keep from dipping into your nest egg, or if you want an account that’s insured, a CD could be right for you. However, remember that the funds typically can’t be accessed without a penalty before the end of the term, you might not earn as much as you could with stocks or bonds, and you could miss out on a higher interest rate if the market changes favorably after you’ve locked into your CD term. 

CD rates

It’s important to shop for the best CD for your needs because many institutions offer different rates and different terms, and the institution might even have an incentive that could be lucrative for you. Depending on how much you plan to deposit, the rate could differ at each financial institution. Local credit unions like Bellco, which offers several different CD products, may offer higher rates than the larger retail banks.

When to get a CD and how to choose the right one for you

CDs are good for when you want to save for an upcoming purchase, but you want to ensure you can’t dip into the funds. They’re also good for when you want to increase your savings but don’t want to risk the volatility of the stock market or other non-insured investments (often, people close to retirement might feel this way).

You might choose a CD based on its term length—perhaps you’re saving for a vacation next year, so a one-year term would be perfect, or maybe you know you’ll want a new car down the road, so a three-year term is more appropriate.

If you’ve determined that a certificate of deposit is right for you and you’ve chosen the type you’d like to use, reach out to the institution you’ve selected to get going. With Bellco, it’s as easy as becoming a member and opening your account online for most CD options, and you can always speak with one of our representatives in your nearest branch.