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What is a Certificate of Deposit?

written by: Marce•edited by: Donna Cosmato•updated: 6/29/2011

A certificate of deposit (CD) is a savings account that allows you to earn more interest than a regular savings account. If you have money you don't think you will need, locking it into a CD may be a good idea.

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    A certificate of deposit (CD) is a great way to get the most out of your savings. If you have money you do not intend to use and want to make more interest than your regular savings account will accumulate, a CD may be perfect for you.

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    Explanation of a Certificate of Deposit

    A CD is a low risk savings plan that allows you to accrue set interest over a specific amount of time. You lock your money into the account and it accumulates interest every month for as many months as you have chosen. For example, if you have $1,000 you want to invest, the first thing you want to do is go to your bank and ask about current CD rates. You will receive information on both the length of the CD and the CD interest rates. Choose the length of time you want to lock your money into the and hand the bank a check.

    Over the duration of the CD length, you will probably receive statements from the bank indicating how much interest has accumulated. Most banks send statements quarterly.

    Once the CD time hs elapsed, you can either ask the bank to roll your CD, take the money out, or roll it over into another CD that fits your needs. If you do decide to keep your money in a CD, it's best to choose the roll over CD yourself. If the bank is left with the decision, they will often roll the CD over into the lowest yielding CD they offer.

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    Things to Keep in Mind with Certificate of Deposits

    When looking over a list of CDs, pay attention to minimum amounts needed to open the account. Some banks have minimum CD amounts ranging between $1,000 and $10,000.

    When considering the length of time to invest your money, keep in mind that interest rates rise and fall. You may see today's high rate CDs as a great deal, but the money in teh CD will need to be locked into that rate for 5 years or more. In 5 years, the interest rates may increase to a much higher rate and you will be left with earning only the rate of interest locked when you invested your money.

    When choosing a bank, confirm that the bank has FDIC insurance. Most insured banks have protection for their customers up to $100,000. Once your savings reaches $100,000 you need to open up another account so you won't lose your money if the bank goes bankrupt.

    Finally, choosing to place your money into a certificate of deposit means that you cannot touch it until the CD is up for renewal. If you do need to withdraw the money, there will be a hefty fee so don't deposit your money unless you know for sure you would only need it in case of an emergency.