What is a Certificate of Deposit? | Union Community Bank
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Certificates of Deposit

When discussing safe investments, an option that is near the top of that list is a certificate of deposit. Many people are familiar with the term, but not everyone knows exactly what it is, how it works, or the benefits of opening one. This article will help you learn more about certificates of deposit so that you can decide if it’s a good investment option for you.

Want a higher CD interest rate? Check out our Union CD Special today.

What is a Certificate of Deposit?

A certificate of deposit, commonly referred to as a CD, is a savings tool that allows you to accrue more interest on a specific amount of money than you would with a standard savings account.

CDs are a fixed term deposit, meaning you agree to deposit a specific amount of money for a specific amount of time. If you leave that money alone for the duration of the agreed upon term, the bank returns the initial deposit along with interest.

Who Might Want to Open a CD?

A CD is the ideal investment option for someone with cash that they don’t need to access for a few months or even years. They are considered a very safe investment option because they’re insured by the Federal Deposit Insurance Corporation (FDIC), so even if something happens to the bank, you’ll receive your money back.

CDs can also act as a great savings tool. If you’re someone who has a hard time saving money long term, the required term limits can be an excellent way to stop yourself from spending that money.

Early Withdrawal

The reason CDs are able to offer a higher interest rate than the standard savings account is the assurance that the money will not be withdrawn until the agreed upon time. As a result, there are fees to withdrawal the deposit early. The fees for early withdrawal vary depending on the type of CD and the bank’s policies.

If you’re concerned about the lack of liquidity in CDs, consider “laddering” your investment. Laddering is placing pieces of a larger sum of money into separate accounts with different term limits. For example, if you were laddering with $10,000, you might consider putting $5,000 into a six-month CD and $5,000 into a 12-month CD. The variable terms will allow you to access the money at intervals, so you don’t have to wait for the full 12 months for the whole sum.

Certificate of Deposit Rates

While CD rates might not offer the highest interest rates, the interest is compounded. Compounded interest is interest calculated on the initial principal and also the accumulated interest of previous periods of a deposit. The interest that you earn is reinvested rather than being paid out. As a result, the interest earned on CDs is always greater than what you’d earn keeping your money in a savings account. Check out this article to learn more about how compounded interest works.

Want to know what CD rates are available at Union Community Bank? Check out our CD rates today.

Types of CDs Available

The types of CDs available to you can vary depending on the bank you utilize. Learn more about the different kinds of certificates of deposit that are available and find the one that’s the right fit for you.

Traditional CD 

A traditional CD has a fixed interest rate over a specific amount of time. Once that amount of time is up, you can either cash out or continue the CD for another term. This is the most common type of CD.

Bump-Up CD

A bump-up CD allows you to swap your CDs interest rate for a higher one if CD rates with the same duration period rise during your investment period. So for example, let’s say you have a CD with a 0.25% interest rate for 12 months. Around four months in, there is a 12-month CD special rate for 0.35%. With the bump-up CD you can switch out the 0.25% interest rate and have the 0.35% interest rate for the remaining six months. Typically, you are permitted to bump up the rate once during a CDs term.

Liquid CD

Unlike other CDs, a liquid CD allows you to withdrawal your money without paying a penalty. The flexibility of this type of CD typically means it will have a lower interest rate than other CDs.

Zero-Coupon CD

With a zero-coupon CD, instead of paying an annual interest amount, this CD re-invests the payments, so you earn interest on a higher total deposit amount.

Callable CD 

Callable CDs can be recalled by the bank after a set period. When it’s recalled, your deposit is returned along with accrued interest. Callable CDs often have a higher investment rate and are offered through brokerages.

Brokered CD 

Any CD offered by a brokerage firm falls into the brokered CD category. A brokered CD usually offers a higher interest rate and the brokerage firm charges a fee when opened.

Jumbo CD 

Jumbo CDs are essentially the same as a Traditional CDs, however they require a much higher minimum balance of $100,000. The higher minimum is required in return for higher rates.

Individual Retirement Account (IRA) CD

IRA CDs offer the steady interest of a CD with the tax advantages of an IRA. There are two different options for an IRA CD – Traditional IRAs and Roth IRAs. A Traditional IRA allows you to contribute pre-tax money into a fund for your retirement so it grows tax-deffered. With a Roth IRA you pay taxes on money going into your IRA with all future withdrawals tax free.

Learn more about your IRA CD options.

Open a Certificate of Deposit Today

Are you ready to let your money make money for you? Visit one of our 14 local branch locations and open a certificate of deposit today. The Union Certificates of Deposit offer a number of benefits including:

Learn more about Certificates of Deposit today.

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