3 Types Of Certificates Of Deposit And What They Mean For You
Certificates of deposit (CDs) are one of the investment options that people have when deciding how to manage their money. They are essentially savings accounts that gain interest, but require that the money be in there for a specific period of time. If the money is withdrawn too early, then the person withdrawing the money will lose some of it as a result of having to pay penalty fees. Commonly, CDs are offered for anywhere from three months to more than five years. Because the money is not able to be withdrawn, it tends to earn a higher interest rate than normal savings accounts. Ordinarily, the time for which the money is deposited in the CD and the rate of interest it earns do not change, but there are a few different types of CDs that break this rule.
1. Variable-Rate CDs
Variable-rate CDs will be connected to a certain market index. If that index is high, then the rate of return will also be high. If the market is low, then the rate of return will be lower, perhaps lower than an average rate of return on a CD. These CDs are excellent for those who want to take risks or believe that they can accurately predict the economy, because when the market index is high, the rate of return will be much higher for that period of time.
2. No Penalty for Early Withdrawal CDs
These are great if you are planning to get a very long term CD and don't know for sure if you are going to need the money before the time period is up. The only problem with this type of CD is that it will usually earn a lower interest rate than those that charge a full penalty fee. Some CDs will have that rate of interest increase after the money has been deposited for an extended period of time. Check with your bank to see if this is the case.
3. Jumbo CD
This CD offers a ridiculously excellent rate of return. The only problem is that it requires the person to deposit a similarly huge amount into the CD upfront (usually $100,000) or more. If you have the money, this is the CD for you. However, the penalty rates for withdrawal are usually abnormally high for this type of CD.
If you have any more questions about the types of CDs that are offered, make sure you talk with a financial institution such as Rio Grande Credit Union.