Thinking of Opening a CD? Make These Moves First
- A CD could pay you a higher interest rate than a savings account.
- Because CDs force you to lock your money up, it's important to think carefully about opening one.
Be sure to check all of them off your list.
These days, banks are finally starting to be more generous with the interest rates they're paying customers. That's because the Federal Reserve has been raising interest rates, and while that's meant costlier loans and credit card rates, it's also meant more interest for savers.
If you have money you don't expect to need for a while but you also don't want to invest, you have a choice. You can put it into a regular savings account, or you can open a certificate of deposit, or CD.
The upside of opening a CD is getting a higher interest rate on your money than what a savings account will pay you. But CDs also require you to commit to tying up your money for a preset period of time (usually as little as six months or as long as five years). So it's important to weigh your options carefully before opening one. Here are a few moves it pays to make before committing to a CD.
1. Compare rates at different banks
One bank might be paying a higher interest rate than another for a CD, so before you open one, do a little research. Banks commonly post their current rates online, so it's easy enough to do some comparison shopping. What’s more, you may want to specifically choose an online bank for your CD. Online banks don't have the same overhead costs as brick-and-mortar banks, so they're often able to offer more competitive rates on different savings products.
2. Compare rates for different CD terms
The length of your CD will dictate how much interest your bank pays you for tying up your money. Generally, you'll snag a higher interest rate for a longer-term CD than a shorter one, so see what options you're looking at. If a two-year CD pays considerably more than a one-year CD, then it could pay to commit to that extra 12 months.
3. Figure out what the money is ultimately for
Maybe the money you want to put into a CD is cash you expect to use for buying a home. Or maybe you're saving for a different goal. Either way, think about the purpose of that money before opening a CD, because that should help you decide how long to lock it up for. If you're looking to buy a home and you know you're years away from having a full down payment saved, you may decide that a two-year CD is a safe bet. But if you're talking about money for a down payment on a car, you may want to choose a shorter-term CD instead.
Opening a CD is a great way to get paid a little more for keeping your money in the bank. But be sure to think things through before committing to a CD. If you end up having to cash out a CD early, you'll be penalized and lose several months' worth of interest in the process. And that's a scenario you're better off avoiding if possible.
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