Pros and Cons of CDs

What are some pros and cons of CDs?

You should not be surprised to learn that there is no “perfect” account offered by any financial institution. However, the wide variety of deposit accounts offered by most banks and credit unions provide many options for saving money, earning interest, and enjoying FDIC protection – currently up to $250,000 per depositor.

The sophistication of online banking gives you more choices at times that are convenient for you, without the necessity of you leaving your home or office. Certificates of deposit (CDs) are one of the most popular account choices whether banking online or in person. Here are some pros and cons you should know about CDs.

Pros include:

• Higher interest rates than traditional savings accounts and money market accounts (MMAs) normally pay.
• Depending on interest posting periods, CDs often enjoy compounding. As interest is posted to your certificate, it is added to your balance and interest then calculates on your original balance plus previous period interest.
• There is minimal risk since your certificate is insured, like other bank accounts, up to $100,000 by Federal depository institutions’ insurance.

Cons include:

• Additions and withdrawals are typically not allowed to a CD. You should be sure that you will not need access to the funds you deposit into a certificate during its term.
• Should circumstances cause you to withdraw some or all funds before the CD maturity date, you will pay a penalty. A typical penalty might be forfeiting three to six months’ interest, or more, if you need to make an early withdrawal.
• Market interest rates could rise during the term of your CD costing you higher interest that you could have earned if you had access to your funds.

While not a perfect savings solution for everyone, CDs – whether purchased in person or online – will often pay you a higher interest rate than traditional savings accounts. When you have available funds that are not needed, CDs can be a good option.

Recommended resource: Compare CD rates