Save Smarter: What Are CDs and How Do They Work?

If you’ve just embarked on your savings journey, figuring out what tools to use can feel like navigating uncharted territory. Even if you’ve been saving for years, there could be savings options you haven’t yet considered. CDs are among those options, and they may be beneficial for you and your financial goals.

Let’s start with the basics: What is a CD? CD stands for Certificate of Deposit, and it is a savings vehicle that works by paying the depositor interest over a selected period of time.

How do CDs work? Put simply, when you choose to place your money in a CD, you are guaranteed a return based on the interest rate. You may not, however, withdraw money during the length of the term without penalty. Not to worry, CD terms vary. A Regular Certificate of Deposit can have term periods as short as 90 days or as long as 60 months.

So let’s look at a real-life scenario. Say you’re planning to purchase a car in the next five years and want to save some money in the meantime. You could consider a Regular Certificate of Deposit with a longer term such as 60 months. With interest compounding daily, you’ll have additional funds to better afford the features you want. That said, it’s important to be honest with yourself about how much money and what length of time is most comfortable for you and your financial goals before choosing a CD. Better yet, consult your banker before making your decision. 

How Do CDs Work? Rollovers and Renewals

Once a CD’s term is up, you can withdraw your money without penalty or choose to renew. However, this decision must be made within 10 calendar days of the CD coming to the end of its term. If no decision is made, a CD is automatically renewed at the current rate offered by the bank. Be sure to keep an eye on these dates, as rates can be higher or lower than the original CD rate depending on the current interest rate environment.

8 Benefits and Considerations of CDs

Before you decide whether or not a CD is for you, take these benefits and considerations into account:

1. There is no monthly service charge.
2. FDIC insured — INTRUST Bank is FDIC insured, meaning our CDs are covered up to the maximum amount allowed. If you’re considering another bank, however, be sure to read the fine print as not all banks offer FDIC insurance.
3. Interest is compounded daily and guaranteed. This allows you to grow your savings without potential risk factors associated with other investments, like stocks and bonds.
4. Rates are often higher than a regular savings account.
5. After the initial investment, the account does all the work for you.
6. CDs automatically renew at the current offered rate and at the same term.
7. Other savings vehicles may have a monthly fee, but they also come with more features such as check access, quicker access to funds and the ability to deposit or withdraw savings.
8. Early withdrawals are not always available. When they are available, there may be a penalty fee, which can mean a loss of multiple months of accrued interest. 

Interested in a CD? Start With These Steps. 

First, evaluate your savings goals. Then ask yourself, “When do I need this money?” A CD may be a good option if your answer is “not right away.” If you’ll need that money in the immediate future, however, a CD may not be in your best interest.

Next, thoroughly evaluate the overall terms of the CD. We know it’s a lot to think about, so feel free to talk to a banker at a location closest to you, visit our Certificates of Deposit page to learn more or give us a call at 800-895-2265.

If you ultimately decide a CD isn’t right for your particular situation, know there are additional savings options available as well as resources to help you plan your savings goals.

Now that you have a map in hand to help you navigate CDs, we hope your savings journey is smooth sailing ahead.