Banking 101: What is a CD?

Banking 101

The term “CD” is the short name for “Certificate of Deposit” and is a type of savings product with a fixed time period and interest rate. When they were first introduced, CDs were issued as a paper certificate that served as proof the funds were deposited at a bank until a specified maturity date and for certain interest rate.

How a CD Works

When you open a CD, a fixed amount of money is deposited into the account for a specific length of time and usually with a higher rate of interest than a savings account. Once you open a CD, the rate is fixed and guaranteed until the end of the deposit period, which is called the maturity date. If you withdraw from the CD before the maturity date (called “early withdrawal” or “breaking the CD”) there are usually penalty fees or the loss of interest (often referred to as a “forfeiture penalty”).

CDs differ from savings accounts because the money must remain untouched for the length of the deposit term. The interest rate on a CD is usually higher than a savings account to compensate the depositor for not being able to access the money until the maturity date.

Each financial institution can set its own terms for length of deposit and interest rate for a CD. Common CD lengths can range from a few months to several years. Institutions sometimes offer promotional CDs with different maturity periods and special interest rates.

The account disclosure statement outlines the interest rate on the CD and whether the rate is fixed or variable. It should specify when the bank pays interest on the CD, for example, monthly or semi-annually, and whether the interest will be paid by check, electronic transfer, or added to the account.  The maturity date should be clearly stated, along with any penalties for early withdrawal of the money in the CD.

When a CD matures, the financial institution typically renews the CD for the same term as the original account and at the interest rate in effect for new CDs on the date of renewal. There is usually a grace period after the maturity date where you can withdraw funds, add funds, or change the length of the CD maturity.

Benefits of a CD

A CD can provide several benefits, especially if you feel comfortable that you won’t need the money before the maturity date.

  • Considered one of the safest savings options.
  • Good mechanism to keep savings safely out of reach while earning interest until the maturity date.
  • Typically offers a higher rate of interest than a savings account.
  • Avoids the volatility of the stock market.
  • CDs bought through a federally insured bank are insured up to the account holder limit by the Federal Deposit Insurance Corp (FDIC), currently $250,000 per account holder.

 

Why a CD Might Not Work for You

There are a few factors that might make a CD less appealing, depending upon your circumstances.

  • CDs require a lump sum deposit upfront.
  • You usually can’t add to the account after the initial deposit.
  • There could be substantial penalties for early withdrawal.

 

To learn about products and services offered by Enterprise Bank including CDs, please visit https://www.enterprisebanking.com. If you would like to speak to an Enterprise Banker about opening an account, we invite you to call us at 877-671-2265 or visit one of our convenient branch locations.

More Learning

Banking 101: What is a Money Market Account?

A Money Market Account (sometimes referred to as a Money Market Demand Account or MMDA) is an interest-bearing savings account which also has features of a checking account.

Banking 101: What is a Safe Deposit Box?

A safe deposit box (or safety deposit box) is an individual secure container, usually a metal box, that stays in the safe or vault of a federally insured bank or credit union.

Banking 101: What are Overdraft and NSF Fees?

The terms “overdraft fee” and “NSF fee” are sometimes used interchangeably, but they are different. The common element to both fees is a shortfall of money in the account.

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