Certificate of Deposit Shopping
CD Shopping
Certificates of Deposit (CDs): Shopping
by Amy Lillard
A safe, interest-earning investment method to grow income. Sounds like all you need to know about Certificates of Deposit, or CDs. But it’s really only the beginning.
The variety of CDs available to consumers has grown and is growing still. Advice on how best to use CDs as an effective investment strategy proliferates. And with the growing diversity, the advice on how to shop for the perfect CD becomes more complicated.
In a series of articles, we take a look at CD types, investment use, and shopping tips. In this article – how to shop for the best CD.
Shopping for the best CD for your purposes is more than simply comparing interest rates and term length. To make wise purchasing decisions, consumers should think carefully about the source of the CD, the details, and the fine-print conditions.
The first step to making a smart CD purchase is understanding and researching the vocabulary. CDs have an extensive amount of phrases and definitions that consumers must be comfortable with to shop effectively. For an introduction or refresher to common CD terms, visit [Link to CD overview article].
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Next, consumers should consider the different sources of CDs:
- Local banks and/or credit unions are often a reliable and popular source for CDs. In fact, banks may routinely offer “sales” on CDs, with the best interest rates found locally.
- Online-only banks always offer some of the best rates. With lower overhead than your local bank, these online institutions can pass the savings on to you.
- Brokerage firms sell CDs through financial advisors and direct sale. These CDs may have higher interest rates, but are often owned by several unrelated investors at once. Deposit brokers do not go through licensing or certification procedures or have oversight by state or federal agencies.
Depending on your specific investment goals, you may find an appropriate Certificate of Deposit from any of the sources above. When shopping, be extremely careful and thorough to avoid any misunderstandings and raw deals. The North American Securities Administrators Association, an international organization devoted to investor protection, developed a checklist of questions for CD shoppers. Ask the following questions of the financial institution offering a CD:
- Who is issuing the CD?
- What is the interest rate?
- Is the CD callable? If so, when and what are the terms?
- What are the withdrawal possibilities? What are the penalties involved with withdrawing funds before the term matures?
- What are the risks? Risks can be associated with the source of the CD (banks vs. brokerages), the penalties associated with withdrawal, or with unforeseen circumstances.
- What fees are incurred? Fees can include seller commission, processing, and more.
A final step for consumers before purchasing CDs goes beyond verbal explanations and communication with the institution. Careful examination of the written terms and conditions, often issued in printed or online booklet form, is the only way to ensure you know what you are buying.
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Federal law requires this disclosure document be made available before CD purchase. Checking this document ensures your protection from unlicensed, uninsured, or other faulty institutions and products. Look for the specifics on interest rates, terms, withdrawal penalties, fees and risks. Also look for surprises, such as:
- The institution may not inform consumers before automatically rolling over CDs at maturity. Moreover, the institution may not comply by the customary grace period (five to seven days) before automatic rollover.
- The institution may require a minimum amount of principal. Any withdrawal below that amount, or withdrawal of any principal, may require closure of the whole CD.
- Fees may be charged for withdrawals.
- Withdrawals may be delayed by up to 60 days.
With a careful and deliberate shopping plan in place, you can find the most appropriate and safe CD option for your goals.
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