What is a CD?

Certificates of Deposit, or CDs, are accounts that bear some similarity to a savings account and are offered by banks. They are usually insured by the FDIC so they have very low risk. The primary difference between a CD and a savings account is that CDs have terms during which you cannot withdraw the money without penalty. They also have a fixed interest rate which means that for the duration of the term of the CD, the bank cannot change the CD’s yield.

Why would I want a CD?

Typically if you are looking for an FDIC insured way to maximize your returns on money over a period of time, CDs will generally have the best rates. Because you are making an agreement not to touch the money for a certain period of time, the bank reciprocates by giving you higher interest rates. Typically a CD will give better returns than even a money market account. The rates can vary considerably from bank to bank however, so it pays to do your research.

CD Guidelines

Often, banks offer higher interest rates for larger CDs. They also typically have a minimum balance to open a CD. For example, you may need to fund your CD with at least $5,000. CDs funded with a larger initial amount, and CDs held for a longer term, may give higher interest rates. So a 5 year, $10,000 CD will generally return a better yield than a 1 year, $5,000 CD.

A few institutions will try to offer CDs that are not insured by the FDIC. Typically they try to entice you into this arrangement by offering a higher interest rate. While this may seem appealing, you are putting your money at risk. Once you remove the FDIC backing on a deposit account, you are already speculating, so you may very well be better off just going ahead and dealing with reputable bond brokers.

High Yield Certificates of Deposit

Finding the best yield on a CD is considerably easier than finding a good money market account. While there are probably just as many, if not more options to choose from, your interest rate is guaranteed, so you don’t have to worry about the bank altering your interest rate. You should however be wary of a practice that many banks use. They will often offer great interest rates on a particular CD term, and then when those CDs come up for renewal, they will offer much worse yields. They are hoping that you will just let the CD renew and they will get a great deal. It is thus important to pay close attention to your CD investments.

Where To Find The Best CDs

While yields will vary based on which banks are in the most need of cash, Ally Bank has generally competitive rates. You can check with BankRate.com, but you will likely find Ally to be the best. Be sure to check out their special rates and offers as well.