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Benefits of Having Certificates of Deposit (CDs)

written by: randalarias•edited by: Donna Cosmato•updated: 7/6/2011

Did you know there are five different types of CDs, each with its own benefit to you? Find out why CDs are better than a savings account and the benefits of having certificates of deposit.

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    One of the benefits of having certificates of deposit is that they are a much safer option than investing in the stock market and also earns better interest than a savings account. CDs will offer you a guaranteed interest rate and the security of knowing your money is insured.

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    It's true that withdrawing your money prior to maturity will incur large penalties. However, it's easy to buy CDs in 3 and 6 month terms, allowing you access to your money at least every 3 months. The same cannot be said for the stock market. Investing your money in stocks means that you'll incur a fee every time you sell and will need to be sure of profit whenever you want to liquidate your funds.

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    One of the most important benefits of having certificates of deposit is the flexibility they offer. There's five different types of certificates of deposit available and each one has a different benefit to you. A traditional certificate of deposit allows you to set aside money to earn a fixed interest rate. If you're worried about rising interest rates, bump-up CDs are available. These certificates of deposit allow you a one-time chance to bump up your interest rate. The cost you pay for a bump-up CD is a lower initial interest rate. If you don't want to worry about penalty penalties a liquid certificate of deposit may be for you. These CDs allow you to withdraw money without penalty, although you'll have to take a lower interest rate for this privilege. If you don't need your money for awhile you can consider a zero-coupon CD, which allows you to buy the certificate of deposit at a great discount to par value. This means that you won't receive any interest payments for the duration of the CD but will get back a much larger amount of money when the certificate of deposit matures. Lastly, for the greatest amount of interest paid to you, callable certificates of deposit are available. These CDs can be called back by the bank after a stated amount of time, usually when interest rates drop. The bank will then reissue the CD to you at the lower interest rate. The great thing about callable CDs is that they let you get a much higher interest rate than usual because of the callback option.

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    Guruswamy, Mini. "How to Buy a CD." 2008. 21 April 2009.