Thinking of opening a CD? Do These Moves First

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Be sure to check them all off your list.


Key points

  • A CD might pay you a higher interest rate than a savings account.
  • Because CDs require you to lock up your money, it’s important to think carefully before opening one.

These days, banks are finally starting to be more generous with the interest rates they pay their customers. That’s because the Federal Reserve has raised interest rates, and while that means more expensive loans and credit card rates, it also means more interest for savers.

If you have money that you don’t think you need for a while, but also don’t want to invest, you have a choice. You can put it in a regular savings account or you can open a certificate of deposit or CD.

The advantage of opening a CD is to get a higher interest rate on your money than what a savings account will earn you. But CDs also require that you agree to tie up your money for a predefined period of time (usually as little as six months or as long as five years). It is therefore important to weigh your options carefully before opening one. Here are some moves worth doing before committing to a CD.

1. Compare rates from different banks

One bank may charge a higher interest rate than another for a CD, so before you open one, do a little research. Banks usually post their current rates online, so it’s fairly easy to make comparisons. Additionally, you may want to specifically choose an online bank for your CD. Online banks don’t have the same overhead as brick-and-mortar banks, so they’re often able to offer more competitive rates on different savings products.

2. Compare pricing for different CD lengths

The length of your CD will determine how much interest your bank will pay you to tie up your money. Generally, you’ll get a higher interest rate for a longer-term CD than a short-term one, so see what options you’re considering. If a two-year CD pays significantly more than a one-year CD, then it might be worth committing to those extra 12 months.

3. Determine what the money is ultimately for

Maybe the money you want to put in a CD is money you plan to use to buy a house. Or maybe you’re saving for a different goal. Either way, think about what the money is for before opening a CD, as it should help you decide how long to keep it for. If you’re looking to buy a home and you know you have years to go before you have a full down payment, you may decide that a two-year CD is a safe bet. But if you’re talking money for a down payment on a car, you might want to choose a short-term CD instead.

Opening a CD is a great way to get paid a little extra to keep your money in the bank. But be sure to think carefully before committing to a CD. If you end up having to cash in a CD early, you will be penalized and lose several months of interest in the process. And that’s a scenario you’d better avoid if possible.

These savings accounts are FDIC insured and could earn you up to 12 times your bank

Many people miss out on guaranteed returns because their money languishes in a big bank savings account earning almost no interest. Our choices of best online savings accounts can earn you more than 12 times the national average savings account rate. Click here to check out the top picks that landed a spot on our list of the best savings accounts for 2022.

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