The most important aspect of a certificate of deposit (CD) is the interest rate. After all, it would not make any sense to invest your money into something that has no return associated with it. It is important to know as much as possible about how interest rates work before you purchase a CD.
The interest rate that you get when you purchase a CD generally depends on several factors such as the amount you invest, the length of time you invest for, and the issuing financial institution that you are dealing with. For example, if you invest the minimum amount allowed for a short period of time, your interest rate will probably be lower. However, if you invest a large amount of money into a long-term CD, there is a good chance that you will be offered a higher interest rate.
In most cases, you will get a fixed interest rate with a certificate of deposit although they are available with a variable rate. With a fixed interest rate you are locked in at the rate that was assigned at the time of purchase. However, some issuers do offer a no penalty feature, also known as a “bump up” feature. This feature allows you one chance to bump up to a higher rate before your maturity date without being assessed a penalty. Normally, the only way to accomplish this would be to withdraw your money early and reinvest it into a higher rate CD, in which case you would be charged an early withdrawal fee.
As noted above, if for some reason you decide to close your CD before it expires, you will be charged an early withdrawal fee. That does not necessarily mean that you can not receive the money that you make from the interest on it. Many financial institutions will allow you to periodically withdraw just the interest earned without penalizing you but be aware that if you do this you will be decreasing the amount that you would otherwise earn if you leave it alone until it matures.
Ultimately, you want the highest interest rate possible with your certificate of deposit. There are some things that you can do to help you get it. Purchase it from your local hometown bank because they tend to offer better rates than the bigger, well known banks. Although it is not advisable, forgoing FDIC insurance could also help raise your interest rate. It also raises the risk level associated with your CD. Lastly, make sure that you are purchasing a personal certificate of deposit and not a business one.
Before you run out and purchase a certificate of deposit, arm yourself with information. Know what the best interest rates are, who offers them, and what stipulations are attached to them. Do not settle for the first offer you come across as you could lose out on a lot of money. While there are other important factors to take into consideration when purchasing a CD, it is the interest rate that determines how much of a return you will get on your investment.
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