The Different Types of CDs Explained

Certificates of deposit, or CDs, are a type of savings account that offers a higher yield than a traditional savings account. They are available from most banks and credit unions. There are different types of CDs, so it is important to understand the differences before you invest your money. In this blog post, we will discuss the different types of CDs and explain the benefits and drawbacks of each one.

1) Standard CDs 

Standard CDs are the most common type of CD. They have a fixed interest rate and term. The interest rate is set when you open the account and does not change during the term. The term is usually between six months and five years. Also, the best 6-month CD rates and the best rates for longer terms are usually reserved for new customers. With a standard CD, you agree to leave your money in the account for the entire term. If you withdraw your money before the end of the term, you will usually have to pay a penalty. Standard CDs are a good choice for people who want to earn a higher interest rate on their savings and can afford to leave their money in the account for the entire term. 

Benefits: 

-Higher interest rate than a traditional savings account

-Can choose a term that best suits your needs

Drawbacks: 

-If you withdraw your money early, you may have to pay a penalty

2) No-Penalty CDs 

If you need access to your money before the CD matures, a no-penalty CD may be the right choice for you. With this type of account, you can withdraw your money at any time without paying a penalty. However, you will likely earn a lower interest rate than with other types of CDs. No-penalty CDs can be a good option if you have an emergency fund or need to cover unexpected expenses. You can also use them to supplement your income if you are retired or unemployed.

3) Step-Up CDs 

A step-up CD offers a higher interest rate after a certain period of time. For example, you may earn 0.75% interest for the first year and then earn a higher rate of return for the remaining term of the CD. This type of account can be a good choice if you expect interest rates to rise over time. Step-up CDs are also a good option if you need to ladder your CDs.

4) Ladder CDs

Laddering is a strategy that can help you earn higher interest rates and protect your money from market fluctuations. With this strategy, you open multiple CDs with different maturity dates. When one CD matures, you can reinvest the money in a new CD with a higher interest rate. This allows you to take advantage of rising rates while still having access to your money if you need it.

Here’s an example of how laddering works: 

Let’s say you have $20,000 to invest and want to ladder CDs. You could open four CDs with $5000 each and maturity dates of one, two, three, and four years. When the first CD matures after one year, you would reinvest the money in a new CD with a higher interest rate and a maturity date of five years. This would leave you with three CDs that mature at different times.

You can ladder CDs with any amount of money. However, you may need a minimum deposit to open some accounts. For example, Ally Bank requires a $2500 minimum deposit for its CDs.

If you’re interested in laddering CDs, compare rates from multiple banks to find the best deal. You can use our CD calculator to see how much interest you could earn with different account terms and rates.

5) Bump-Up CDs

A bump-up CD allows you to increase your interest rate once during the term of the CD. This can be a good choice if you expect rates to rise over time. With this type of account, you may need to give the bank advance notice before you increase your rate. For example, let’s say you have a bump-up CD with a term of five years. After the first year, you may be able to increase your interest rate once. To do this, you would need to notify the bank at least 30 days before your CD matures.

6) Jumbo CDs

Jumbo CDs are similar to regular CDs, but they require a larger minimum deposit. For example, you may need to deposit $100,000 to open a jumbo CD. Jumbo CDs typically offer higher interest rates than regular CDs. This is because the bank can use your money for investments that may be riskier but have the potential to earn a higher return.

Jumbo CDs can be a good choice if you have a large amount of money to invest and want to earn a higher interest rate. However, you should make sure you won’t need access to your money for the term of the CD. This is because you may pay a penalty if you withdraw funds early.

When deciding whether to open a jumbo CD, compare rates from multiple banks. You can use our jumbo CD calculator to see how much interest you could earn with different account terms and rates.

7) IRA CDs

The Different Types of CDs Explained
The Different Types of CDs Explained

IRA CDs are similar to regular CDs, but they’re held in an IRA account. The money you deposit in an IRA CD can be used to grow your retirement savings. IRA CDs offer the same features as regular CDs, such as fixed interest rates and terms of one year or more.

IRA CDs can be a good choice if you’re looking for a low-risk way to grow your retirement savings. However, you should be aware of the rules and regulations that apply to IRA accounts. For example, you may pay a penalty if you withdraw money from an IRA CD before the maturity date.

When choosing a CD, it’s important to consider your financial goals and needs. CDs are a safe and low-risk investment, but they may not be right for everyone. If you need access to your money before the CD matures, you may want to open a no-penalty CD or a high-yield savings account instead.