WHAT IS A CERTIFICATE OF DEPOSIT (CD) ACCOUNT?

Banks and other financial institutions usually offer their clients ways of earning more money on their deposits. The most common way they do this is by offering the client an interest rate on the money they deposit, given the client fulfills certain conditions. A certificate of deposit is therefore one of the most common ways you can earn interest on your deposit.

In simple terms, a certificate of deposit, or a CD, is a type of account whereby you agree to deposit a certain amount of money with your bank without withdrawing for a certain duration in exchange of a certain interest. Although the term certificate of deposit describes that agreement between you and the bank, you will still be issued with a physical certificate. For the bank, a CD is a way of securing money for their operations and for the client it is a way of growing their money.

The amount of interest given on a CD usually depends on the amount of the deposit and the duration of deposit. Higher deposit amounts usually attract a higher interest rate. A longer maturity period also attracts a higher interest rate. Smaller banks will usually offer a higher interest rate than the bigger banks in an attempt to attract more clients. In the same light, personal CDs attract a higher interest rate than business CDs.

Most CDs have a minimum deposit, and the shortest maturity period is typically three months. You can also go for six months, a year, two years and even five years. To protect customers, the Federal Deposit Insurance Corporation (FDIC) usually insures CDs, and you are assured of never losing your principal even if the bank collapses. There are, however, banks and institutions that are not insured by the FDIC meaning that there is greater risk when opening a CD with such banks.

Once the maturity date has been reached, the client can withdraw the total amount (principal plus interest) into their checking account. They can also opt to renew the contract either with the whole amount or with some of it. If a customer withdrawals money form the CD account before the maturity date, they will be charged an early withdrawal penalty which depends on the bank and the duration of the CD. In most cases, the client will only lose some part of the interest but not the principal.

A certificate of deposit offers certain benefits that makes it attractive to clients. For one, instead of money sitting idle, it will earn an interest, which is usually higher than the interest earned in a checking account or a savings account. Two, it is a safer option than other options such as bonds and stocks which can depreciate and eat into your principal. Finally, you can always negotiate for better rates for maximum benefits.

On the other hand, a CD has certain demerits. The main one is that you will not have access to your money for the agreed period, and should you insist on withdrawal, then you will be penalized. Two, other investment options might be more profitable than the CD. All in all, a CD is an investment worth considering.