Certificate of deposit, what it is and how it works

certificate of deposit

What is a certificate of deposit? 

A certificate of deposit, or CD as an acronym, is a savings account type that allows individuals to save an amount over a fixed period and earn interest. Unlike a typical savings account, a CD is left untouched over a fixed duration and attracts a fixed interest percentage. 

A CD also differs from a typical savings account in that the liquidity control of the account is traded off for the interest offered at the end of the saving period. 

Note- If you wish to withdraw a CD before the time allotted- a fee is removed as a penalty. 

Getting deeper into CDs

Suppose you are considering investing your money into a certificate of deposit. In that case, you are making a great decision because a certificate of deposit is a safe, reliable, yet profitable form of investment. A high-paying certificate of deposit pays much more than many savings accounts. 

Getting a CD opened is quite similar to getting a typical savings account opened, only that the terms and conditions of a CD vary from that of a standard savings account. In doing this, there are at least four principal points you have to take note of: 

  • Your institution of choice

The institution—bank/credit union you choose is vital because it determines the safety and terms surrounding your investment. Your institution determines the fees you pay for early withdrawal of your funds and what to do with them if you don’t withdraw on time. It also determines the shortest investment time and minimum deposit.

  • The Principal:

This is the money you will deposit in the savings account. But for unique CDs, your minimum capital is determined by the bank or credit union of your choice. 

  • Terms of Investment:

You can be assured that your funds are safe in a CD because the agreement terms are clear before the investment. These clear terms make it straightforward for both parties to know what to and not to expect. Having a fixed deposit has downsides, but the benefits will most likely outweigh the disadvantages.

The interest rate is fixed by the bank or credit union. The institution is expected to stay the same at any point in time. However, most CD rates range from 1.3% to 1.8% in year 1. Significantly high-paying CDs pay as much as 5.5% in its first year. 

Why CDs are safe

Aside from the fixed interest rate that helps stabilise the savings account, FDIC also regulates CDs- Federal Deposit Insurance Corp, the same institution regulating and protecting all other deposit packages in banking institutions and the National Credit Union Administration– the institution that guarantees Credit Union in the USA. 

If you consider opening a CD with any institution, you must be sure that the FDIC or NCUA guarantees it. These protection agencies can guarantee as much as $250,000 in deposits by an individual. If an insured bank or credit union fails (which is not the norm), one can be assured that their funds are safe and secure.  

Note—if you would like to be cautious, it is better to save in multiples of $250,000 across multiple institutions or in the name of a trusted family member or friend. 

Who does CD’s work for? 

Why is a CD a good option for me? This question is likely on your mind since there are many other options to make an investment and even earn greater profits- one may think of alternatives like stocks, bonds, and precious metals. The answer is quite apparent in the benefits/characteristics and modus of CDs.  

First, a CD keeps your investment safe over time, making it the right option if you want a blend of unwavering safety and moderate profit. Considering the volatility of the stock market, someone who likes to keep it safe because of a plan they have for their money will not make it an option. 

Secondly, a CD is an excellent option for someone wanting to learn financial discipline. Someone once said that rainy days always come when he has a lot of money. If you spend a dollar from a million dollars- it immediately drops from a million to thousands. In that case, a CD is an excellent way to keep money out of your reach so that in the presence of an ‘urgent need’, you will not be tempted to make a withdrawal, knowing fully well that a withdrawal means that you will lose a part of your savings for withdrawing earlier than the agreed time. 

Below are some pros and cons of saving in CD;



  • Even in the case of an emergency, you will attract a penalty to withdraw your funds.
  • It does not offer as much profit as stocks and bonds
  • Increasing inflation can make the money less valuable when its maturity time 
  • In a CD saving system, the profit and duration are agreed upon before the saving is done; hence, if the interest rate increases, it does not affect your investment. 

Renowned CD banks or Credit Unions

Below is a list of recommended and reputable banks and credit unions you can save your money in a CD:

Annual percentage yield – 5.51%

Minimum deposit – 1.00 dollar

Minimum duration – 12 months

Annual percentage yield – 5.50%

Minimum deposit – 0.00

Minimum duration – 12 months 

Annual percentage yield – 5.35%

Minimum deposit – 500 dollars 

Minimum duration – 13 months 

Annual percentage yield – 4.20% – 4.80%

Minimum deposit – 1,000 dollars 

Minimum duration – 13 months 

Annual percentage yield – 4.20% – 4.80%

Minimum deposit – 1,000 dollars 

Minimum duration – 7 months to 19-months

(Be sure to verify the rate that applies to your state): These rates are subject to change based on specific economic and financial policies, so check the official website for the latest information. 


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1 Comment

  1. I have learned many things from this article which are very important. Thanks for telling me these things.

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