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Certificates of Deposit

Certificates of Deposit, commonly called CDs, are financial products that work a little like a savings account but with significantly higher interest rates. CDs require an initial investment up front in the form of a lump-sum deposit. The amount of the deposit is then kept in the CD for a specific period of time. During that time, the owner can’'t take the money out or add to the amount of money that is in it. The money remains throughout the agreed upon time period.

The amount of interest that the CD generates is usually dependent on how long the time period is. The longer the time period is, the higher the interest rate will generally be. In most cases, there are tiers of interest rates that require specific month or year terms to earn a higher interest rate. That would mean that a three-month CD and a six-month CD might have the same interest rate but that a one-year CD might have a significantly higher one. The time period may be as long as five or 10 years or as short as a month or two.

How Certificates of Deposit Work

One of the main draws of buying a CD is that the money is safe and will be returned to the buyer. They don’t come with the same types of financial risks that stock investments always do. With CDs, the interest rate can do one of two things for the buyer of the certificate of deposit. The interest rate can be paid to the buyer as soon as it is earned. The buyer can then either take the money out or can roll the principle amount into a new CD for a new time period. The interest rate can also be rolled into the CD along with the principle so that the principle becomes increased.

Another benefit of buying is that interest rates offered for this type of financial product are generally higher than if the same amount of money was placed into a savings account for the same period of time. To get a certificate of deposit, consumers can visit a bank or a credit union. To get the best interest rate, shop around and be willing to do so each time the CD matures and the money is available in order to take advantage of the best rates.