Dec 15th, 2014 Bank Account
Certificate of Deposits (CDs) is an investment option available with the banks, credit unions and online banks where a customer agrees to store a certain amount of sum for a fixed period of time with the bank. During this period, the customer does not have access to the money stored in the CD account.
If the customer wishes to withdraw the funds before the agreement’s due date, the customer has to pay a penalty fee for it. Usually this penalty fee would be more than the interest earned on the account. Hence, it’s advisable to invest in a CD only if the customer is sure to keep aside the money for the decided period in the agreement.
Certificate of deposits with banks, credit unions and online banks
Customers who have existing accounts with banks, credit unions and online banks can open an additional CD account with them, the CD account will appear with a separate account number. Interest rates on CD’s are different between various financial institutions. Generally, online banks offer best rates on CDs followed by CUs and then banks; however, there can be exceptions.
In order to get the best rates, it’s advisable that customers compare interest rates and other features of CDs offered by various financial institutions by checking information online, through newspapers, banks, credit unions and telephone banking services.
CD’s and savings accounts are different in nature, especially in the form of interest earned and immediate access to money. If customers are looking to earn high interest for their savings and they don’t require their money in the near term, they can opt for CD’s.
Saving accounts interest rates are comparatively lower than CD’s but customers can withdraw funds from saving account whenever they want. It’s not the same with CD accounts, customer cannot access the money stored in the CD’s for the decided period of time. This gives financial institutions the opportunity to use the funds stored in CD’s by giving them in the form of loans, mortgages and credit cards. Due to this reason the interest provided on CD’s is higher than savings.
Within Certificate of Deposits (CDs) accounts, there are different options available to the customers such as
Fixed CD account: CD accounts with a fixed interest rate and duration are known as fixed CD accounts. This is a normal CD account where customer comes into an agreement to store funds for a certain period of time with a fixed interest rate. If the customer wishes to use the funds before the due date in the agreement, then they would have to pay the penalty fee to access the funds in the account
Liquid CD’s: This type of CD accounts usually start with a low interest rate, as it gives customers the flexibility to use the funds without having to pay the penalty fee for withdrawing the funds before the maturity of CD as per agreement. Even though these accounts give the flexibility to access fund, they do have many rules and regulations related to the same. Therefore the customers have to understand them carefully before opening this type of CD, or else they would have to pay other fees related to the same. If customers predict an increase in CD’s interest rates in future and are sure about the same, then opting for a liquid CD account would be beneficial. As the customer can withdraw the funds and invest in a CD with a higher interest rate.
Bump Up CD’s: This type of CD accounts gives customers the option to switch to a higher interest rate once or twice during the term of CD agreement. Bump up CD’s are usually starting with a low interest rate, hence it’s advisable to check the pros and cons before applying for the same. The increase in the interest rate will only be applied, provide the customer contacts the bank and requests to increase the rate based on the information gathered.
Brokered CD’s: These types of CD accounts are CD’s sold in brokerage accounts. It’s a system where customer can buy numerous CD’s with different banks and maintain them all at one place. Such accounts are usually risky, as some banks may not have insurance and provide high interest rates. In such cases the customer has a risk of losing their savings in case of failures; hence a thorough research is required while opening brokerage accounts.
We see that all these accounts have to be compared and analyzed at the time of opening a CD account in order to earn high interest rate with CD’s. While customers open CD’s they need to check if the bank or credit unions are insured by FDIC and NCUSIF. Because CD’s insured by them are safer and secure to invest with.
Several factors influence customers while investing in CD’s, some of them are interest rates, reason for saving, customer needs, amount to be saved and duration of savings. It’s more likely that CD’s with a longer duration period are likely to earn more interest. . Some of the strategies, customers can follow for investing in CDs are listed below
Bullets methods: Such a method is applicable for customers who choose to use the funds for a specific reason at a certain time. In such case bullet method can be used where customer invests in numerous CD’s and all the accounts mature around the same time.
Example: Miss P plans to get married in September 2015; she would save in numerous CD accounts probably from 2011 and they all would come to maturity by September 2015. This will give her access to her funds along with the interest earned on all the accounts and she can use it successfully for her wedding in Sept 2015.
Ladder Method: This method is used by customers who do not wish to save money for a using it in the near future, in this method the customers aim to earn a higher interest rate and its suitable for them due the uncertainty of interest rates on CD’s. Customers invest in 5 or more CD accounts for different terms in ascending order. And when a CD matures, they invest in the longest term CD in the ladder to earn more interest on their CD’s.
Barbell Method: This strategy is similar to ladder method but in this method customer also invest in short term CDs along with long term CDs. This provide the investor opportunity to take advantage of new interest rates on long term CDs as they can invest the returns of short term CDs into new long term CDs. Barbell method is seen as more secure and adaptive method in comparison to the ladder method.
CDARS (Certificate of deposits accounts with registry service): It’s a program which allows customers to spread money among various banks, so that they stay below the FDIC insurance limits at any given bank. This is suitable for customers with huge savings, who seek security and high rate of interest on their savings. To avail this feature customer should contact the bank that’s participating in the CDARS program. If the customer applies for this program, bank will do the rest for them along with investing the money in CD’s with different banks based on the limit insured by FDIC.
Therefore we see that customers can earn more on CD’s based on different scenarios, hence it’s always beneficial for customers to do a proper research and apply for a CD account that’s most beneficial for them.