For a long time, depositing money into a certificate of deposit was a surefire way to lock in a good interest rate. A CD is a good way to save for a short-term goal, as well as a good way to diversify your portfolio. Many people like the ease of use and clear purpose associated with a CD. They also appreciate that their interest rate will remain static for the term of the CD.
Look beyond the stated rate
These days, it seems impossible to find a CD with a good rate that you can take advantage of without doing a ton of research. Even with comparison sites widely available, there are other things to take into account when choosing a financial institution to leave your money with for three to sixty months.
While it may sound like some kind of financial product, a certificate of deposit is really more of a savings account. As such, it has strict rules that govern it. This is important when comparing rates. Much like a savings account, there are penalties involved, as well as some fine print you should make yourself aware of. The rates are one thing, but knowing what comes along with those rates is just as important.
Things to look out for when making comparisons:
- Automatic renewals – Many financial institutions have automatic CD renewals. This is something you should watch out for, especially if your CD is for a short-term goal. You wouldn’t want to have a 5-year term suddenly start over without your say so. And if that happens and you try to withdraw your money, you will have to deal with penalties.
- Penalties – All CDs come with penalties, even those CDs advertised as not having any penalties. These penalties vary from CD to CD. One institution may take some interest; others may impose a hard fee. Some institutions actually allow early withdrawals, but these have their own rules regarding how it happens. It may seem like it, but most financial institutions handle penalties in completely different ways from the next. Make sure you pay attention to possible penalties.
- Interest – Understand how the financial institution will calculate the interest. This is another thing that varies from place to place, and it can make a large difference in your money’s growth. Some institutions will start compounding on a specific date or in a specific way.
- Control of your money – Look closely at the financial institution’s stance. Many of them will have something in their official terms that openly state that they can change or pretty much do whatever they want with your rate, length of term, interest calculations or anything else. If you have ever seen something like “subject to change at any time without notice,” then you need to take notice.
Shopping for the best rate
Many reputable places offer CD comparisons. These places may not offer all the details that go with those CDs. It’s up to you to do the legwork and make sure that you are locking into a deal that’s beneficial for you.
There are more advanced things that you can get into with CDs, such as rising-rate CDs and liquid CDs. You may also find that laddering your CDs will offer you the most benefit from certificates of deposit. But when it comes to shopping around for the best rates, just make sure that you factor in everything that comes with that rate. You may find that a lower rate with less penalties and more control beats out a higher rate with draconian penalties and a lack of control over your assets.