What to consider when you are considering certificates of deposits

Certificates of deposits offer higher interest rates than traditional savings account but there are factors to consider before making the investment.

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Traditional savings accounts have interest rates that are hovering around .01 percent. Consumers who want a low risk investment vehicle with a higher interest rate may want to consider Certificates of Deposits (CDs).

CDs are deposit accounts that pay a higher rate of interest over a predetermined amount of time. This time frame can be anywhere from six months to five or more years. Consumers agree to leave their deposit untouched until this period has passed. This is when the CD reaches maturity. A mature CD will pay the original deposit amount plus interest. If the funds are needed before the CD is mature, then an early withdrawal penalty is charged.

Finding the best interest rate is easy. Bankrate.com is a website that offers free rate information to consumers. Keep in mind that interest rates can be fixed or variable. Variable interest rates can change during the life of the CD. The interest may be paid at different intervals (for different CDs), such as monthly, semi-annually or only at maturity. A bank may provide an attractive interest rate on callable CDs. Callable means that a bank can terminate the CD after a certain amount of time, if interest rates begin to fall.

Interest rate information is not the only determining factor when choosing a CD. It is wise to purchase a CD from a federally insured bank where each depositor is insured for $250,000. BankFind is a website that can verify that a bank is insured. CDs can be purchased through stock brokerage firms. Consider this alternative if there is a significant sum to deposit. The broker will combine the funds from multiple depositors and negotiate a higher interest rate with a bank. Select a reputable brokerage firm and have a clear understanding of their CD processing policies and fees.

Consumers must know the maturity date of their CD and if any action is required on their part at maturity. Request the maturity date in writing and find out if the CD will automatically renew if no action is taken. Consumers will want to know if the new or old interest rate will be used at renewal and what other changes may take place.

Michigan State University Extension suggests that consumers read all documents concerning the policies and procedures for their potential Certificate of Deposit. Ask questions and understand your rights before depositing your savings.  You can find more information about saving and investing at MIMoneyHealth.

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