Key insights:
- Certificates of deposit (CDs) usually offer higher, fixed interest rates compared to traditional savings accounts, providing a low-risk way to grow savings
- CD deposits are insured up to Federal Deposit Insurance Corporation if they’re made at an FDIC-member bank.
- While CDs provide predictable returns, they lack flexibility, generally imposing penalties for early withdrawals and missing out on potential rate increases
- CDs can be ideal for those with specific financial goals or who want to balance their portfolio with stable, low-risk savings options
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.
CDs offer favorable interest rates
There are a few different ways that interest rates might be favorable for CD account holders, including:
- Potentially higher interest rates: Compared to traditional savings accounts, CDs generally offer higher interest rates, so your funds may grow faster over the term.
- Fixed rates: Many 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, consider asking about promotional rates. Financial institutions may offer promotional rates for certain CD term lengths, which may help you earn more interest than other terms.
CDs are insured
CDs at FDIC-member institutions are insured up to FDIC limits. CDs offered by credit unions may also be insured up to the National Credit Union Administration (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 types of CDs come with different rates and terms:
- Long-term CD: Typically, if you choose a longer term, your financial institution may be more inclined to offer a higher interest rate.
- Short-term CD: If you think you may want to access your funds sooner rather than later, you may choose a shorter-term CD, but the interest rate may be lower.
- No penalty CD: 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.
- Step up CD: 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 help your account grow over time.
CDs can complement your investment strategy
CDs may be a good, lower-risk option to go alongside your investment portfolio because deposits at FDIC-insured financial institutions are insured up to applicable FDIC limits, 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 to choose a ladder approach, which spreads your funds across multiple CDs with different maturity dates. With a CD ladder, some of your funds become available to you earlier than others, giving you a degree of liquidity as your CDs mature.
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. The fee might even be higher than the amount of interest earned on the CD, and the difference would be made up from the amount of your initial deposit. Your funds might be a little less flexible than 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 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 an investment account.
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 FDIC insured up to FDIC limits (if the financial institution is a FDIC-member institution), they generally offer more stability than some investments. If you want to balance your investment portfolio with lower-risk deposits, a CD may be a good option.
- You want predictable returns: Fixed rates and insured funds mean you can generally count on the amount you’ll receive when your CD term ends.
- You’re 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 with 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 you value liquidity, you may prefer a standard savings account. Before opening any new accounts, you might consider speaking with a financial expert to help make the right decision for your needs.
Citi offers Fixed Rate CDs, No Penalty CDs and Step Up CDs, each with terms and balance ranges of your choice. Explore and compare CD account rates today to find the right option for you.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
