What is a Certificate of Deposit (CD)?
A certificate of deposit, or CD, is a financial product that is commonly offered by banks, credit unions, and other financial institutions. A CD is similar to a standard savings account in that a person will deposit a given amount of money, called the principal, in order to receive interest payments on that money. However, there are a few key differences between a CD and an ordinary savings account.
Differences Between a CD and a Savings Account
Unlike typical savings accounts, CDs are time deposits, which means that the deposited money can not be withdrawn for a predetermined period of time. This period is known as the CD's term, and it often varies from 6 months to 5 years. If someone owns a savings account, he/she is generally permitted to withdraw his money whenever he pleases. But if someone owns a 2-year CD, he will not be able to freely withdraw his money until the end of the 2-year term. Once the term has expired, the CD is considered to be matured and the owner is free to withdrawal all of his money, or to renew the CD. If the owner wishes to withdrawal his money before the CD matures, he will have to pay penalties. These penalties are determined at the time the CD is opened and they are typically substantial enough to destroy any gains from interest. These fees are designed to deter premature withdrawal; the owner will only withdrawal his money if he faces an emergency or if he finds another investment that will yield significantly greater returns.
So, why use a CD? Continue reading Benefits of Bank CDs to find out.