There are different types of CDs. Here are a few of the most common ones.
- Traditional: The most common. You put in a fixed amount and receive a predetermined interest rate for a specific period of time. At the end of the term you can withdraw your money or roll it over for another term. Most financial institutions allow you to add additional funds when you roll over the CD. Penalties for early withdrawal can be quite severe.
- Fexible: Other than the traditional CDs, there are flexible CDs that allow you additional options if you need some of your money sooner. The downside is that many of these flexible options offer lower interest rates than the traditional CDs because of the flexibility they allow. Here are a few of the more flexible types of CDs:
- Liquid: These CDs offer you the opportunity to withdraw money without incurring a penalty, however, most banks require you to maintain a minimum balance in your account. An exception is that after you make the initial deposit Federal law requires that the money stays in the bank for at least seven days. The bank might extend that period, so check. Sometimes the banks only allow a specified number of withdrawals during a month or a quarter—again, check the fine print. The interest rate is usually less than that of a traditional CD.
- Bump-Up: This allows the customer to take advantage of rising CD rates, if they apply. Generally this is only allowed once during the CD period and takes affect for the balance of the CD. If, for example, you have a CD (what is the length of the CD, 2 years?) rate at 2.0 APY (Annual Percentage Yield, see below), after a year the bank is offering a 2.25 rate. You would be able to receive the 2.25 rate for the remaining one year on your CD. Before you buy a bump-up CD you should be reasonably certain that interest rates will rise before your CD matures. And be aware some CDs are Callable.
- Callable: Sometimes banks offer CDs that can be called, or taken away before they mature after a certain specified period of time. Banks often pay you a premium (of a quarter- to one-half percentage point) for a callable CD. For example, you purchased a three year 4% CD with a one call protection period. If after one year the going CD rate falls to 3.0%, the bank could call the CD. You would receive your principal, plus 4% for the one year you had the CD. If the rates go up, I guarantee you that your CD won’t be called! If you decide to keep your money in a CD, the rate would only be 3.0%.
CD rates vary and are very competitive. When you shop for a CD, the rate will be quoted as APR (Annual Percentage Rate) or APY (Annual Percentage Yield).
- Annual Percentage Rate (APR): The interest rate a bank is offering on the CD. You will also see this term if you intend to get a loan from a bank. This is the rate consumers pay, expressed as a simple annual percentage rate. Or in this case, the APR the bank pays you! Note: If you are borrowing money (which is not what this section is about) the APR is calculated using interest, origination fees, and points (complicated and not covered here).
- Annual Percentage Yield (APY): This is a tool to see how much your deposit will earn over the multi-year life of the CD as your money compounds. This will tell you how much you are really making on your money over time.