NewsReak Financial

Because of the Federal Deposit Insurance Commission (FDIC) protection on our bank savings accounts, many people view CDs as the safest option available right now even though interest rates are low.

CDs pay interest on your money in a way similar to your typical savings account, however, CDs can pay higher rates based on a APY (annual percentage yield) by locking in a particular APY over a specified period of time. The longer the period of time you “lock in,” the higher the interest rate will be.

“Locking in” means that you agree to keep your money in a particular CD at a particular bank at a particular rate by filling out a simple form and disclosure at that bank. If you should decide to take out your money before that specified time is up, you will usually pay a penalty for early withdrawal.

The bank uses invested monies to lend or reinvest. That is why they want you to “lock in,” because then your money is less likely to leave the bank until your specified “lock in” time is over.

The highest paid CD rates usually involve the longest “lock in” times. For instance, if you choose a 3 month CD you might earn 1.2% interest APY, however, choosing a 5 year CD might earn you 3.50% interest APY over the 5 year period.

When your CD “matures” (the date your CD term ends), your agreement with the bank ends for that particular rate you had agreed upon and the bank will stop paying the rate you agreed to and you can withdraw your money from the bank without a penalty.

When your CD matures you usually have a window of time of 10 to 15 days to decide whether you want to take your money out of the bank or reinvest it again with the bank. Many banks will automatically reinvest your matured CD into another new CD if you don’t give them alternate instructions. If you do not want your money rolled over, make sure you let the bank know ahead of time.