This is, perhaps, the first holiday season in a long time where we’re in an economic environment favoring deposit rates. Maybe you already spent all your money on gifts for the family. If not, you may be wondering if it would be wise to invest some of that money for the future. Strike while the iron is hot and all.
First things first. Are you a part of the generation who thinks of a CD as a secure and reliable way to grow your savings? Or does the term CD create visions of shiny discs full of musical tunes? Perhaps you think of neither of these things when someone says “CD”.
A certificate of deposit is a method of saving money and earning interest, that’s largely fallen off the charcuterie board of banking options in the last decade or so. Why, you may ask? The rate environment was more favorable toward loan pricing than deposit pricing for many years. This is a function of economic health rather than anything any one entity has done.
That being said, the rate environment started to change in the last twelve months. It was maybe late summer or the fall of 2023 that brought with it the opportunity to consider Certificates of Deposit once again.
There are some things to consider when shopping for a CD, though. In keeping with a festive theme let’s call these the Three Wise Tips for CD shopping.
Wise Tip One: Make sure you’re looking for a CD at an institution that is insured by the FDIC. Do your research regarding how much coverage you have, and investigate whether having other accounts at that bank affects your FDIC coverage. The FDIC has a handy guide and maybe even a calculator for determining what your coverage is at https://www.fdic.gov/resources/consumers/consumer-news/2022-08.html.
A CD is not the same thing as a stock, bond, annuity, or other type of security. Each form of investment comes with its own set of rules and restrictions as well as coverage level. They are not created equal, and all have different levels of risk associated with the vehicle of coverage.
Wise Tip Number Two: you need to make sure you understand how the interest accrues on the account (i.e. when does it pay out and how). Plus, research the terms of the agreement. Are there penalties for early withdrawal? What happens upon maturity? How long until the CD matures? Not familiar with any of these terms? Check out our blog articles on CDs to learn more:
- Advantages and Disadvantages of a CD (https://blog.centralnational.com/2017/10/cd-pros-and-cons/)
- CD vs. Savings Account (https://blog.centralnational.com/2019/09/cd-vs-savings-account/)
- Basics of a CD Ladder Strategy (https://blog.centralnational.com/2020/09/basics-of-a-cd-ladder-strategy/)
And finally, the Third Wise Tip: be suspicious of rates that seem too good to be true. There IS such a thing as deposit fraud. Is there a Nigerian prince or a phishing pole in use with this type of fraud? Not generally. Typically, when your deposit dollars are at risk it’s a more complicated scheme. First, you will find an abnormally high rate (at an institution you’re probably not familiar with) who is trying to lure in deposit dollars. Whatever the reason, the whole goal is to get your foot in the door so they can flip those funds into some other type of deposit that’s perhaps riskier or not FDIC insured. Heck, maybe the institution is just in trouble financially and looking to avoid failure.
Whether you are opening a brand-new CD or moving funds because you’ve found a better rate somewhere else, you should make sure you’re checking rates locally and nationally to determine whether the rates are reasonable given the current environment. And then do your research on the institution if you’re putting a considerable amount of money into the CD. How is the bank’s capital position? Are the ratings positive? Are they still in good standing with the FDIC? There are several entities who report on the quality of a bank’s assets and evaluate institutions based on a lot of complicated financial ratios. You don’t have to understand all the terms to get answers. Check with the FDIC or Consumer Financial Protection Bureau to learn more. Sometimes the longevity of the institution is a good indicator of financial health and stability. Central National Bank, for instance, has been in operation since 1884 and has a long history of recognition for being well-capitalized as well as a safe, secure place to store your funds. To learn more, or check out our current CD rates, visit our website at https://centralnational.com/rates.asp