Advantages and Disadvantages of CD Accounts

The abbreviation CD stands for certificate of deposit. Like all investments, there are both advantages and disadvantages of CD accounts. First, let’s take a look at the positive aspects. First of all, they are one of the least risky types of investments out there. They are insured by either the FDIC or NCUA (depending on whether you buy from a bank or a credit union) meaning that even if the financial institution goes under your money is safe. And, there are different terms available for CDs, which range from as little as three months to as long as five years.

When it comes to interest rates, it depends on your term. A longer term means higher interest. Another good thing about investing in a certificate of deposit is the seven day period after maturity that you can use to figure out what you want to do with your funds. And, CD rates are fixed, which means they stay the same throughout the term. The interest does not go up and down with the changes in the market. And, you can usually count on a CD to give you higher interest than a savings account.

One thing you should know is that interest rates actually vary from bank to bank, and credit union to credit union. Usually, a credit union will have the best rates, but you still need to do some research and shop around. These financial institutions compete for your business so you may need to look at quite a few and compare rates before you find the highest possible rate for your certificate of deposit. Also, you will need at least $500 to buy a CD, sometimes more. This is much higher than the amount required to open a savings account.

A disadvantage to owning a certificate of deposit is that if you need to access your money before the maturity date there will be a penalty applied. Before you purchase a CD, make sure you are using money that you will not need to access and ask about the amount of penalty charged just in case the unforseen happens and you do need to withdraw early. Yet another downside to owning a certificate of deposit is if you don’t withdraw your money or take another type of action upon maturity, it rolls over to what are the current interest rates. These rates may be lower than you would want. However this is where the aforementioned seven day grace period is an advantage, it gives you time to make a decision.

When weighing the advantages and disadvantages of CD accounts, for the most part this type of investment is a good choice. It is certainly a good addition to your current portfolio, as many experts recommend you have a balance of different investment types and levels of risk. Certificates of deposit are low risk, so if you can hold onto them until they mature you are pretty much guaranteed a return on your investment.

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