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What is a CD and How Does it Work?

Are certificates of deposit worth it? Here we explain CDs and how a TDECU Certificate of Deposit may be a good, low-risk financial product to help you reach your financial goals. 

What is a CD and How Does it Work?

When you think of using a financial institution to secure your money, you likely focus on setting up a savings or checking account. Did you know there is another kind of bank account that can guarantee your money will grow with no risk to you? Certificates of deposit from a credit union or bank are hidden gems that may be just what you need to grow your personal finances.

What is a Certificate of Deposit?

A certificate of deposit, or CD, is a type of savings account designed to hold a fixed amount of money for a fixed period of time. The depositor agrees to leave the money untouched during the negotiated term, and in exchange, the lender pays interest. When the designated time is up, the CD is “cashed in” or redeemed for the amount of the initial deposit plus all accrued interest.

How Does a Certificate of Deposit Work?

Three primary factors drive the amount of money you can earn from a deposit account.

  • Initial deposit. The amount of money you place in the CD. Most banks require a minimum deposit to open a CD.
  • Term for the CD. The period of time for the initial deposit must stay in the account until the CD matures, and you can withdraw the money with no penalty.
  • Interest rate. This rate is locked in for the entirety of the term. The annual percentage yield (APY) is the actual rate of return earned for the year.

You cannot add money to a CD, and if you take money out before maturity, you may incur an early withdrawal penalty.

The final amount of interest you earn when your CD matures depends on the interest rate, the term of the CD, and the frequency in which the credit union or bank compounds interest or adds the CD interest income to your account. TDECU, for example, compounds monthly.

Initial Deposit

Banks and credit unions require minimum opening deposits for CDs which usually depend on the type of CD. Count on depositing at least $1,000 for a standard CD. If you choose a jumbo CD, you may need $100,000, but you will receive a higher interest rate in exchange.

You can avoid tying all your savings to one CD with a CD ladder where you open multiple CDs with varying maturity dates, meaning some will mature before others. This strategy also keeps cash on hand as an emergency fund for unexpected expenses.

Preset Term

Unlike traditional or regular savings accounts, you determine the amount of money and the length of time your money will stay in the CD upfront. CD terms typically range from short terms of 3 or 6 months to longer terms of 3 years or more.

The term impacts withdrawal penalties and interest rates. Long-term CDs of 5 years or more will generally return higher interest rates than shorter terms, but that is not always the case.

Fixed Interest Rate

CDs have fixed interest rates to go with a fixed term. In other words, CDs earn the same rate throughout its life. The good thing is you can avoid riding the roller coaster of changing interest rates. However, if rates rise, your CD will not adjust to the new rate.

Generally, certificates of deposit are considered one of the safest savings options, according to the U.S. Securities and Commission. So, even if you miss out on an interest rate increase, your money is safe.

Your CD Accounts are Protected

CDs are backed by the full faith and credit of the United States government. The National Credit Union Administration (NCUA) protects most credit union CDs, including CDs at TDECU. The government guarantees you will get your money back if your bank or credit union fails. The covered amount is limited to $250,000 per person, bank, and account category. Interested in depositing more than $250,000 into a TDECU CD? Contact TDECU Member Care at (800) 839-1154 to assist you.

TDECU CDs Help You Save for the Future

A TDECU CD - IRA, jumbo CD, or standard –is a safe and dependable way to grow your money regardless of how the stock market and interest rates fluctuate.

TDECU Certificates of Deposit currently feature these benefits:

  • Up to 4.00% annual percentage yield (APY)
  • 3 to 60-month terms
  • Up to 250,000 insured by the NCUA

Contact us today to open a new CD.