Do I Need a CD (Certificate of Deposit)?
Like any savvy saver, you want to make the most of your money. Set up a savings account? Done and dusted. Establish stock market investments? They’re in the books. But now you’re wondering, “Do I need a CD?” Including a credit union certificate of deposit (CD) can be a smart addition to your money management strategy.
A traditional credit union CD, also known as a share certificate, is a type of savings product that offers a fixed interest rate on a lump sum of money for a specified period. Credit unions provide a variety of CD options, with varying terms, and CDs at credit unions often pay higher rates than banks. To learn more about how a CD can help you achieve your financial goals, use our Credit Union Locator Tool to find a credit union near you.
Do I Need a CD?
If you’re looking to invest a lump sum of money, whether or not to put it into a credit union certificate of deposit depends on your personal situation and goals. CDs typically have higher interest rates than standard savings accounts, but if you make an early withdrawal, you’ll usually have to pay a fee.
Among a CD’s benefits is that it offers a relatively high-interest rate without any of the risk or volatility associated with the stock and bond markets. The tradeoff is that CDs don’t have the same growth potential as stocks and, in most cases, you cannot access the money before the account matures. Overall, a CD is a good option if you're risk-averse and looking for a safe, long-term investment.
CDs can also be an effective tool for achieving short-term goals, like saving for a vehicle or a once-in-a-lifetime trip. You can safely invest your money for a specific time — anywhere from one month to 10 years — knowing that it will earn interest and grow in value. Moreover, you're less likely to tap into your savings because most CDs come with a penalty for early withdrawals. This deterrent doesn't exist with regular savings or money market accounts.
However, the money is there if you need it if an unforeseen crisis or accident occurs. Just be aware there will likely be an early withdrawal penalty (EWP). The EWP is typically a certain number of months’ interest, depending on the term, which is determined when you first open the CD.
How Does a CD Work?
Opening a CD is essentially the same as opening any regular financial account, although it does have several unique qualities. For example, while some financial institutions don't necessitate a starting balance to open a CD, others have minimum investment requirements ranging from $500 to $25,000. Therefore, shopping around to explore and compare available options is important, as different financial institutions have varying rates, terms, requirements, and promotions.
With a traditional CD, however much you invest, you're contractually obligated to leave the money on deposit at the financial institution for a set period. In return, the financial institution pays you a predetermined interest rate and guarantees the repayment of the principal at the end of the term.
CDs work similarly at any financial institution, whether it's a bank or credit union certificate of deposit. However, it's helpful to know that credit unions consistently offer higher interest rates than banks. Additionally, the length of time you agree to leave your deposit in the CD account also affects the interest rate — the longer the term, the higher the rate.
With most CDs, once you lock in your interest rate, it cannot be changed, so your return will be consistent. But there are drawbacks. A CD with a fixed rate means that you can’t take advantage of higher-paying rates without opening a new CD account.
A CD's "maturity date" refers to the day the term ends, and you can access your money without penalty. Once it reaches maturity, you can roll over the CD into a new CD, transfer the funds into another account, or withdraw the funds. Determining your maturity date and whether you want a short- or long-term CD depends on both your financial goals and market influences, like actions of the Federal Reserve Board.
The Fed raises and lowers the interest rate depending on various economic conditions. If it's expected that the Fed will implement a rate hike, it's most beneficial to go with a short- or mid-term CD, so you won't be locked into a lesser rate when higher rates go into effect. At the same time, if rates are expected to decrease, it makes sense to get a long-term CD so you can lock in the current high rate for your desired length of time.
Different Types of CDs
Traditional CDs are a safe and conservative investment option. While they impose penalty fees for early withdrawals, they have a fixed interest rate and a consistent return. But if you're looking for more flexibility and control, other CD options are available. Some different types of CDs include:
- Bump-up CD. You're not locked into a specific rate when you open a bump-up CD. If, during the term of your CD, your financial institution raises the annual percentage yield (APY) on that product, you can request the higher rate. Generally, you're only allowed one bump-up per term, and a bump-up CD typically has a lower APY than a traditional CD.
- Step-up CD. Similar to a bump-up CD, a step-up CD allows you to take advantage of higher interest rates. But with this product, the financial institution automatically increases your rate by a set amount, as specified in the terms of the CD. As with a bump-up CD, it’s important to assess interest rate trends before making any commitments.
- No-penalty CDs. As the name implies, this product allows you to withdraw money before the CD's maturity date without incurring a fee. In exchange for this liquidity, the interest rate is usually lower than a traditional CD. And most financial institutions require that the money stays in the account for a set time, typically seven days, before it can be withdrawn without penalty.
Pros of CDs
CDs may not be suitable for everyone, but these qualities make them a promising option:
- High interest. CDs offer a higher interest rate compared to savings or money market accounts.
- Guaranteed return. They’re a safe, conservative investment with a guaranteed rate of return and none of the risk and volatility that come with stocks and bonds.
- Federally insured. The Federal Deposit Insurance Corp. provides insurance for bank CDs, and the National Credit Union Administration insures credit union CDs. The insurance covers up to $250,000 of your funds on deposit.
- Encourage savings. Most CDs include an early withdrawal penalty, a deterrent for tapping into the funds early.
Cons of CDs
While CDs offer plenty of benefits, there are also some drawbacks you should consider:
- One-time deposit. After your initial investment, you cannot make additional deposits into a CD account, unlike a money market or savings account.
- Possible penalties. Most CDs impose an early withdrawal penalty if you liquidate the account before maturity.
- Less reward. While not as risky, CDs usually earn less than stocks and bonds in the long term.
- Rate limitations. Most CDs lock you into a fixed rate of return regardless of whether the Fed increases interest rates during the term.
Credit Union CDs
CDs are a great option if you want to make more money off your savings. And, because of their not-for-profit status, credit union CD rates typically can't be beaten. Credit unions also tend to have more flexibility regarding CD terms, such as early-withdrawal penalties and minimum deposit requirements. You can also expect excellent customer service, as credit unions are owned by their members.
Further Resources on CDs and Their Role as a Saving and Investment Tool
For more information on credit union certificates of deposit and overall investment tips, check out these resources:
- Explore the benefits and risks associated with CDs. The U.S. Securities and Exchange Commission’s Investor.gov helps consumers make wise investment decisions. Resources include information on a variety of investment products, including CDs.
- Learn CD tips and tricks. Get Rich Slowly provides information about personal finance and related topics, including CD best practices.
- Tune in and watch. Practical Personal Finance is a searchable YouTube channel that posts news videos every week with helpful investment and saving advice.
Open Your Credit Union CD Account Today
If you’re looking for a safe and reliable investment product with a guaranteed return, a credit union CD can be a great option to help you achieve your financial goals. Use our guide to find a credit union near you, where you can learn more about CDs, including current credit union CD rates.