The Pros and Cons of Certificates of Deposit

A certificate of deposit (CD) is a type of savings account that earns interest over a predetermined period called the term. Until your CD matures, or reaches the end of the agreed-upon term, you generally can’t withdraw your funds without paying an early withdrawal penalty.

CDs allow you the opportunity to earn interest on your funds, but they might not be as flexible as other account options. Let’s take a closer look at the advantages and disadvantages of a CD so you can decide if it’s right for you.

The pros of CD accounts

CDs offer useful benefits. Let’s examine how each of their advantages might look for you.

Certificates of deposit offer favorable interest rates

There are a few different ways that interest rates might be favorable for CD account holders, including:

• Potentially higher rates: Compared to traditional savings accounts, CDs generally have higher interest rates, meaning your funds may grow more over your term.
• Fixed rates: Some CDs offer fixed rates, so even if the market takes a downturn and interest rates drop, your CD’s potential returns should remain unaffected.
• Promotional interest rates: If you are flexible about when you want to access your funds in the future, consider asking about promotional interest rates. Financial institutions may offer promotional rates for certain term lengths that may help you earn more interest than others.

CDs are insured

CDs may be FDIC-insured up to FDIC limits. CDs offered by credit unions also may be insured up to the National Credit Union Association (NCUA) limits. So if your financial institution goes bankrupt, you won’t lose your funds if you have a CD at a covered bank or credit union.

CD accounts come in a range of terms and types

Different CDs come with different rates and terms. Typically, if you choose a longer term length, your financial institution may be more inclined to offer a higher interest rate. If you think you may want to access your funds sooner rather than later, you may decide to get a CD with a shorter term length, but the interest rate may be lower.

Likewise, you may be able to find a no penalty CD that doesn’t charge a fee if you want to access your funds before the end of your term. No penalty CDs may still require you to wait a certain amount of time before you may access your funds without a penalty, but they generally don’t require you to wait out your entire term length if you qualify for early withdrawal.

You may also opt for a step up CD, which increases the CD’s APY at fixed intervals throughout the CD’s term. This might allow your account to grow more over time.

CDs can complement your investment strategy

CDs may be a good, lower-risk option to go alongside your investment portfolio because they’re insured up to a certain amount and you generally can’t lose money like you can on an investment in the stock market. One way to maximize the benefits of your CDs might be by choosing a ladder approach, which spreads your funds over multiple CDs that have different maturity dates. So some of your funds become available to you earlier than others, giving you a degree of liquidity as your CDs mature over time.

The cons of CD accounts

While CDs offer benefits, they also have downsides. Let’s take a look at some of them so you can decide whether a CD is right for you.

CDs may have an early withdrawal penalty

Many standard CDs may charge you a fee if you withdraw your funds before the end of your term. Your funds might be a little less flexible than they would be in a traditional savings account. That’s why some users may prefer a no penalty CD, which typically makes your funds available for withdrawal before the maturity date.

CDs carry an interest rate risk

A fixed interest rate can be a double-edged sword. With a fixed-rate CD, you may miss out on better rates if the market improves after you’ve deposited your funds.

CD returns may be lower than other investments

Investment options like stocks, bonds or exchange-traded funds (ETFs) may earn more for your money than CDs, but they also pose more of a risk. It’s important to consider your overarching financial goals before you deposit money into a CD or make an investment.

Are certificates of deposit right for me?

CDs might not be right for everyone, but they may offer benefits to certain account holders. CDs could be a good choice if you:

• Want a low-risk way to grow your savings: Since CDs are federally insured, they offer more stability than some investments. If you want to balance your investment portfolio with lower-risk deposits, using a CD may benefit you.
• Want predictable returns: Fixed rates and insured funds mean that you can generally count on the amount you’ll receive when your CD term comes to an end.
• Are saving for a specific financial goal: A CD may be helpful when you’re saving for a longer-term future expense. If you know you won’t need the money until the term ends, a CD could help you save for future costs and give you a higher interest rate than a conventional savings account.

CDs may not be the best fit if you’re seeking quick returns or want to preserve your liquidity. You may want to consult with a financial advisor to decide what’s best for you.

Certificates of deposit: the bottom line

Whether or not to put your funds into a CD depends on your specific banking preferences. If you want access to higher interest rates than most savings accounts and don’t mind less access to your funds, then a CD might be a good choice for you. If, instead, you value more liquidity, you may prefer a standard savings account. Before opening any new accounts, you may want to speak with a financial expert to help make the right decision for your needs.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.