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An alternative to a regular savings account is a savings
certificate, also known as a certificate of deposit (CD) from a
bank, savings and loan, brokerage firm or as a share certificate
from a credit union. CD's earn money at a higher rate of
interest than savings accounts. By signing up for a CD, you
agree to leave money with the savings institution or brokerage
firm for a specified period of time. Many factors go into
deciding on a certificate of deposit. Below are a few guidelines
for finding one.
Minimum Deposit Amount
When comparison shopping for a CD, ask, "What is the minimum
deposit amount required?" A typical minimum requirement is
relatively affordable and required to earn the institution's
disclosed interest rate and annual effective yield. However,
some savings institutions may require minimum deposit amounts
that are much more expensive.
Length of Maturity
Typical maturities for CDs are seven to 31 days, three, six, 18,
24, 30, 36, and 48 months. Some institutions offer flexible
maturities, allowing investors to select a CD length that
matures precisely on the day they have a need for the money.
Typically, the longer the maturity and the larger the dollar
amount placed in the CD, the higher the yield.
How Often Compounded and Credited
Compounding generally means that interest is being accrued on
earned interest. Crediting interest to the CD may be done
annually, semiannually, quarterly, monthly, or daily. Some
institutions indicate that interest compounds every day, but
that the interest is not credited until quarterly, at maturity,
or even when cashed in. Other institutions do not pay accrued
interest if an account is closed before the interest is
credited.
Penalty for Early Withdrawal
Institutions often advertise a "substantial penalty for early
withdrawal." For example, the disclosure statement from one bank
revealed a minimum penalty equal to seven days simple interest
on a 3-month certificate while another institution imposed a
penalty of one month's interest. On a 24-month certificate of
deposit, one institution imposed a penalty of seven days simple
interest while another imposed a penalty of three months. If the
account does not earn enough interest to cover the penalty, the
difference is deducted from the principal of the CD.
Method of Interest Payment
Typically, there are four ways you can receive interest that is
earned on a CD.
1) leave interest in the account and add to the certificate
balance so that the interest earns interest at the same rate of
the CD;
2) have the interest mailed quarterly or monthly in the form of
a check;
3) have the interest credited to a checking account (in cases 2
and 3, you are not receiving the benefit of interest compounding
on interest); and
4) have the interest credited to a savings account, but the
earnings are receiving the lower savings account rate rather
than the higher CD rate.
Certificate Maturity
Find out the policy of the financial institution when a
certificate matures. Is the money rolled over automatically into
a new certificate without changing the interest rate? Such
action works to your disadvantage if interest rates have
increased. Are funds transferred into a lower-paying regular
savings account or a checking account if the money is not rolled
over? Are the funds renewed at the latest rate? Does the
institution provide notification of an upcoming maturity date?
Or are you expected to remember it?
Other Services
Do the institutions offer other services as incentive to deposit
funds with them? There are a lot of benefits for CD holders, ask
around and see what services seem most important to you.
You may freely reprint this article provided the following
author's biography (including the live URL link) remains intact:
About the author:
John Mussi is the founder of Direct Online Loans who help
homeowners find the best available loans via the www.directonlineloans.
co.uk website.
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