Do you have any CDs? No, not the latest George Strait compact disc, but
the “Certificates of Deposit” kind.
A certificate of deposit (CD) is a special type of deposit
account with a bank or savings institution that typically
offers a higher rate of interest than a regular savings account. CDs are low-risk investments that are federally insured
up to
$100,000. If
you have other accounts with the institution, make sure that
you have set them up so that all are insured. The FDIC has a tool called EDIE that you can use online
at www.fdic.gov.
How Does a CD Work?
When an individual purchases a certificate of deposit, he
invests a fixed amount of money for a fixed period of time
ranging from one month to 10 years or longer. The financial institution issuing the CD pays the investor at
regular intervals. When it is time to cash in the CD, the investor receives
all of his original investment, plus any interest that has
accrued over the time period. However, if the investor redeems his CD before the maturity date,
he will have to pay an “early withdrawal” penalty. The penalty for withdrawing within the first week is set by law. However, otherwise it is fixed by the institution.
While CDs
originally paid a fixed interest rate until the CD matured,
today’s investor can choose from variable rates, long-term
rates or a special redemption feature in the event of the
owner’s death. You may compound interest or have it paid to you by
check or electronic transfer.
Before investing in a CD, be sure to read all of the disclosure
statements and don’t hesitate to ask your banker for help
in understanding any questions you may have. Make sure you understand when the CD matures. Some
CDs automatically renew.
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The rate typically changes at
renewal. The institution is required to give you an advance
notice of the changed rate.
Some CDs give the issuing financial institution the right
to terminate the CD after a set period of time, but the investor
may not have the same right. Make sure to investigate any call features of the CD. Typically callable CDs are sold by brokers—
sometimes over the phone. Your State Securities Board should have a helpful checklist
to use in evaluating these as investments.
Keep in mind
that although CDs are a safe investment, interest rates are
locked in. While
this is good in a bad economic market, if rates go up, you’re
stuck with a locked in rate unless you have a variable rate
CD with a good index.
CDs can be
a good investment for young and old alike. For younger people, a high yield long term investment
with a maturity date of 18-20 years may be a good investment. However, if you’re 55 or older, you might prefer a
CD with a shorter maturity date. Many Americans may be hesitant to deal with today’s
volatile stock market. They want to know their money is safe, federally insured
and will provide them with a predictable source of income.
Check with your local community banker to see if a CD is right
for you.
CONSUMER TIPS is provided as a public
service by the Missouri Independent Bankers Association
AND
Community Bank of the Ozarks
P.O. Box 43
Sunrise Beach, MO 65079
(573) 374-5245
1-800-927-4314
www.cbobanker.com
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