CD
What is a Certificate of Deposit (CD)?
Banks and Credit Union's have two basic types of deposits. One is a "demand deposit" that includes checking accounts. These are accounts from which you can withdraw money on "demand".
The second type of account is a "time deposit". These accounts have some restrictions on your ability to withdraw funds. A savings account usually has a condition in the terms that allow the bank or credit union to impose a delay in making your funds available. This restriction is seldom invoked.
Other "time deposit" accounts are very restrictive. These are Certificate of Deposit accounts. They have a specific term, or number of months that the funds must be left in the financial institution (for example 12 months). If the funds are withdrawn before the full term has completed then a penalty is charged by the financial institution (see Types of penalties). Because you commit to leaving your money on deposit for a specific amount of time the institution normally pays a higher rate of interest for these deposits than it would for money in a "demand deposit" account. For more on why they pay a higher rate see the section titled "How banks/credit union's set rates".
June 12th, 2009
I feel like if I open a CD for any length of term now when the rates are so low, I still won’t see a better than average return in the future. Does anyone have any suggestions?
June 12th, 2009
Amy, I am thinking along the same lines. Theres seems to be no logic in tying up money in a low rate CD when the rates are changing so frequently. I’d prefer to have it available to withdraw without penalty and put into something more favorable when the rates increase…and they will.