A certificate of deposit is a safe and secure way to grow your savings balance.
If you’re looking for a guaranteed return on the money you invest, a certificate of deposit (CD) offers a secure and reliable solution. But if you want to make your money work as hard as possible to build a larger savings balance, you’ll need to find the financial institution with the best CD rates. The higher the interest rate that applies to your funds, the more money you get when your deposit matures.
To find the best CD rates, you’ll need to compare a range of account options and shop around for the best deal.
Our top pick: American Express® Personal Savings CDs
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The importance of high CD interest rates
As they are specifically designed to help you save money, certificates of deposit offer a higher rate of fixed interest than you’ll find on a savings account. The interest rate is locked in for the entire term, offering the consistency of earning a fixed interest rate and protecting you against any interest rate drops like the one that occurred in May 2016.
But while a fixed interest rate offers security, it also means you’ll miss out on rising interest rates. Even if the bank’s interest rate goes up, the fixed rate on your account stays the same until the deposit matures.
Finding the best CD rates means more interest to grow your savings balance. Let’s take a look at a case study to demonstrate just how much difference a slightly higher interest rate can make. George has $10,000 he would like to invest in a CD for a maximum of two years. He knows this’ll guarantee him a fixed return on his investment and he likes the security that CDs offer. George decides to compare CDs between his bank and its main competitor to find the best interest rates. George’s bank offers an interest rate of 2.25% and compounds interest monthly, which means at the end of 24 months, George’s $10,000 deposit will have earned $459.84 of interest. Meanwhile, the competitor bank offers an interest rate of 3% on CDs of $10,000 or more, which allows George to earn $617.57 in interest. By choosing the second account with the better interest rate, George can save an extra $157.73.
George’s certificate of deposit
Feature CD from his bank CD from competitor Term 24 months 24 months Minimum deposit amount $5,000 $10,000 Interest rate 2.25% 3.00% Amount invested $10,000 $10,000 Interest earned $459.84 $617.57 Total balance at end of term $10,459.84 $10,617.57
George has $10,000 he would like to invest in a CD for a maximum of two years. He knows this’ll guarantee him a fixed return on his investment and he likes the security that CDs offer. George decides to compare CDs between his bank and its main competitor to find the best interest rates.
George’s bank offers an interest rate of 2.25% and compounds interest monthly, which means at the end of 24 months, George’s $10,000 deposit will have earned $459.84 of interest.
Meanwhile, the competitor bank offers an interest rate of 3% on CDs of $10,000 or more, which allows George to earn $617.57 in interest. By choosing the second account with the better interest rate, George can save an extra $157.73.
The pros and cons of investing in a CD
- Guaranteed returns. When you invest your money in a CD account, you’ll get a guaranteed return when the deposit matures. You’re also protected against any interest rate drops because your account’s rate is locked in.
- Attractive interest rates. CDs allow you to earn a better interest rate on your money than savings accounts do.
- Plenty of choices. Banks and credit union all over the country offer CDs, giving you the ability to compare options before choosing an account.
- If interest rates go up, you lose out. Even if the bank’s interest rates rise while your money is locked away in a CD, your rate stays the same.
- It’s hard to access your funds. If you want to access your funds before the end of the term, you’ll need to give your bank 31 days’ notice, and pay a fee.
Features of the best CDs
Compare the following factors when deciding on a certificate of deposit:
The interest rate
The interest rate payable on your CD balance is critical when deciding which account offers the best deal. A high interest rate means better returns for you. However, accounts with higher interest rates may have special conditions attached, like high minimums for opening an account or unusually large fees if you need access to your money early.
How often the interest is compounded
How often interest is calculated has an effect on the amount of interest you can earn. For example, an account that compounds interest monthly will end up paying more interest over time than one that compounds interest annually.
Where the interest is paid
Next, look at where the interest your account earns is paid when the deposit matures. For example, will you need to have a linked account with the same bank, or can you have the money sent to other financial institutions?
Minimum balance requirements
Check to see what the minimum and maximum balance limits are for the CD. Usually they’re at least $1,000. Are they suitable for the amount of money you’re looking to save? Compare accounts that match your requirements.
The terms available
Compare how long you’re able to save your money with each account. Terms typically range from six months to five years, so make sure the time period you choose suits your needs.
Historical CD rates
Average CD rates fluctuate over time. For example, in the early 2010s, CD rates were steadily declining, but in 2014 they began to rise again. The chart below shows the national average over the last six years:
|Date||National average for 12-month CD||National average for 60-month CD|
Certificates of deposit provide a secure, convenient way to build a sizable savings balance, but it’s important to find the best interest rates to ensure that the money in your account is working as hard as possible. Spending the time to shop around for the best rates and watching for the best time to open a CD can help you save for a more reliable future.