Point of Interest
Answering the question, “Which CD is right for me?” involves more than just interest rates. The best types of CDs will fit your risk tolerance and financial situation.
While a standard certificate of deposit (CD) is a great option for anyone looking to get a better rate than a standard savings account, there are 11 different types of CDs to consider. Depending on your savings goals, the amount of capital you have to put down, and your desired term length, one type of CD may prove to be far more advantageous than the other.
Conversely, investing in the wrong CD is a mistake that can cost you a lot of money. That’s why it’s important to take the time to find the best possible CD for your financial goals.
Types of CDs available
Traditional CDs are the most common and generally the best type of CD for most people. They are simply deposits where you’ll receive a fixed amount of interest by keeping your money in the account for a set amount of time. That interest rate is typically much higher than regular savings accounts.
The catch is that you can’t touch your money until the term is over unless you’re willing to pay a hefty penalty. Terms can last only a few months or extend to 5 years. Generally, the longer the term the better the rate.
Step-up CDs start at a set interest rate, then at specified intervals jump up to a higher rate. The CD issuer always sets the rate of increase and the periods of which it happens. These types of CDs are meant to counter market rate increases since with a traditional CD you’re stuck with the rate for the whole term even if the market rate rises.
Picking a step-up CD is therefore a strategic financial move for people concerned with getting the best rate possible over time. Terms are usually around 28 months but can go up to 5 years.
Bump-up CDs are similar to step-up CDs in that the interest rate will increase after some time. The difference is that you, the CD holder, have to initiate this increase – the issuer doesn’t do it automatically.
Usually, only one rate increase is allowed, and that rate is determined by the market. Bump-up CDs also have lower starting rates, meaning that they generally attract people who think the market is going to increase sooner rather than later. You can get a bump-up CD for anywhere between 12 months to 5 years.
CDs that require a large initial deposit – typically sitting at around $100,000. These huge accounts also generally have higher interest rates attached – making them perfect for people with a lot of capital who want to make the most out of their money.
The best jumbo CDs will still have terms that range from 12 months to 5 years, but most tend to lean on the longer side.
Add-on CDs allow you to keep adding funds into your account throughout the term – making them one of the only types of CDs that let you do this. Typically, the CD issuer sets limits to how much and how often you can put money in.
Terms can start at just 12 months, but this type of CD benefits those who invest in the long-term.
Overall, if you’re the kind of person who wants to do something more productive with their money as it comes in, then this can be a good option. However, if the need arises to withdraw money, you’ll be out of luck.
Liquid (no penalty) CD
Liquid CDs give you the option to withdraw funds without a penalty after a set amount of time has passed (usually a year). These types of CDs don’t have the best CD rates available, but they can still beat out traditional savings accounts.
Since these CDs offer a bit more flexibility, they’re good for people who are apprehensive about not having access to their money. That said, liquid CDs have a limit on the number of times you can make a withdrawl; typically, this is 2 or 3 times total. This power can give you some comfort selecting a longer-term in the 1 to 5-year range available.
High-yield CDs have rates that exceed the national average. These can last between 3 months and 5 years and are the best type of CD people who want to maximize their return. The hard part comes from comparing the best rates available, which takes a bit of research and time.
These act like bonds. Instead of paying your interest over time, a zero-coupon CD will pay you a set value once the CD matures. Generally, these types of CDs are thought of as minimal risk, since the amount you get at the end is set. That end date usually leans on the longer side but can last between 1 and 5 years.
These are often sold through brokerage firms, so they’re geared more towards diverse investors who want minimum risk.
Callable CDs can be seen as a bit of a gamble. You get a higher rate than with a traditional CD, but the bank that issues it has the option to “call” your CD back and issue you a new rate. This usually happens when the market rate decreases, and therefore it can lead to you getting a lower rate in the end.
Callable CDs do come with a call-protection period. This is a timeframe where the bank cannot call your CD back, usually around 6 months – anything after is fair game. These CDs attract people who are comfortable with the risk associated with a higher earning potential. Mid-range terms of around 1-3 years are the most common, but you can get them for between 3 months to 5 years.
Simply a CD sold through a licensed broker. This means people treat them a bit more like bonds and they are therefore often seen as a more liquid investment than other types of CDs. Terms range from 3 months to 5 years, and the interest rates can vary across the board.
People who already go through a broker for other investments will get the most out of these types of CDs, as it makes it easy for them to consolidate their investments.
CDs are a type of investment. IRA CDs are a way for you to invest your retirement account in them. IRA CDs have smaller yields than other investment options but offer much lower risk – perfect for people who don’t want to risk their retirement.
Also, because of the low risk associated with these CDs, many IRA CD holders opt for the longer terms of between 3 to 5 years, but they do exist for shorter periods.
Which CD is right for you?
- Standard/Traditional CD: The best type of CD for people who simply want to earn more interest than with a traditional savings account.
- Step-up CD: For those eager to squeeze a bit more out of their yield without increasing their risk.
- Bump-up CD: Great for people who want control over exactly when a rate increase happens.
- Jumbo CD: For those with large amounts of capital who want a lower risk investment.
- Add-on CD: For those who will be getting money in the future but would like to start earning a higher yield now with what they have.
- Liquid CD: For people who may want to/need to dip into their savings in the future.
- High-yield CD: Perfect for people who are looking for the best rate possible.
- Zero-Coupon CD: For low-risk investors who want minimal risk.
- Callable CD: High risk, high reward type investors looking to earn the most from their investment.
- Brokered CD: For people who already have a broker and would like to diversify their portfolio.
- IRA CD: For those who want to pad their retirement while maintaining minimal risk.
The final word
CDs are a great low-risk investment strategy available to anyone who wants to put their money to work. Whether you have a lot of money to invest or not, CDs are a great way to help you build more capital over time. Picking the best type of CD for you comes down to comparing yields and key features of each.
The only real major risk for CDs comes from not being able to touch your money for a set period, but the large variety of types and diverse features you can pick from helps ensure that your risks remain minimal while your opportunities remain diverse and flexible.