5 Common Mistakes People Make With CDs -- and How to Avoid Them

A certificate of deposit (CD) offers you a fixed interest rate in exchange for locking your savings up for a set amount of time. They can be a nifty way to grow your savings, not to mention instrumental in freezing today's best rates.

But CDs aren't the most intuitive bank product. Many come with strict terms and conditions, which might trip you up later if you haven't read them carefully. To help you maximize your CD returns, here are five of the most common CD mistakes people make.

1. Not shopping around

These days, it's not hard to find a good CD rate. But to find the best CD rates, you may have to do some digging.

As of mid-March, most short-term CDs (think: terms of 12 months or less) have APYs above 5%. Long-term CDs (terms longer than 12 months) have rates above 4.50%. If you come across a CD with a rate lower than those, it's probably not a good deal. Likewise, if you find CDs with rates higher than those, it's likely you found a good rate.

The best way to determine if you're getting the best deal is to compare CDs with the same term. For some perspective on this, you can look at the best CDs on our term pages.

• 6-month CD
• 12-month CD
• 18-month CD
• 2-year CD
• 3-year CD
• 4-year CD
• 5-year CD

2. Picking the wrong CD term

The CD term is how long it takes for a CD to mature. For example, if you had a 1-year CD, then you would have to wait one year before you could withdraw your principal again. CD terms can range from one week to 10 years or more.

Picking the wrong CD term can mean a few things. For one, it could mean picking a CD term that's too long. This could force you into a position where you may have to withdraw money before your CD matures, which, as I'll discuss below, can be costly.

On the flip side, the wrong CD term could mean picking one that's too short. This might be the case if you have extra savings that you're not going to use for the next few years, but you play it safe and get a CD that matures quickly. Since banks are likely going to reduce CD rates later this year, your short-term CD might mature at a time when rates are much lower than they are now. In this case, a long-term CD might mean freezing a high rate for a longer period, thus helping you maximize interest growth.

3. Breaking your CD contract

An early withdrawal penalty is the price you pay to gain access to your principal (the money you initially deposited). They can be especially harsh, typically amounting to a fixed period of interest, like six months' worth. And yes -- you can lose money in a CD.

Many short-term CDs have penalties worth three to six months of interest, while long-term CDs can have penalties worth 18 months or more. If you haven't earned enough interest to cover the penalty, your CD provider will dip into your principal to cover the rest.

One way to prevent yourself from paying early withdrawal penalties is to get a no-penalty CD. As the name suggests, these CDs don't impose a penalty. If you're interested, check out the no-penalty CDs on the Raisin platform.

4. Withdrawing interest

Although you can't withdraw your principal, most banks will let you cash out the interest you earn periodically. Some will even let you set up automatic withdrawals, which transfer the interest to your checking account after it hits your CD account.

The problem with this is that withdrawing interest can reduce your CD's stated APY. Since most CDs grow by compound interest, less money in your account means less growth overall.

Of course, if you need cash fast to cover an emergency expense, withdrawing interest is a better solution than liquidating your CD account. But if you can help it, leave your interest and principal intact for maximum growth.

5. Setting up auto-renewal

Most banks will automatically renew your CD contract after it matures. Often, you'll have a grace period, usually a week or so, during which you can withdraw your money and close your CD. If you don't take action, your bank will set up a new CD contract with an APY that matches the ongoing rate.

That means if rates are down at the time of renewal, your bank could lock you into less-favorable terms.

Banks will typically remind you when your CD is going to mature. But set a reminder for yourself, too. Even if you want another CD, you should still shop around to make sure you're getting the best rate. And if you don't want a CD, you can prevent yourself from locking into another term.

Again, CDs are a nifty savings tool that can lock in a generous APY for the length of your term. As long as you avoid the five mistakes above, your CD could help you beat inflation without taking on the risks of other investments. Take a look at some of the best CD rates on the market today and start earning more interest for your savings.