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What is CD in banking?

Published in CD Banking 2 mins read

In banking, a CD refers to a Certificate of Deposit, a type of savings account.

Understanding Certificates of Deposit (CDs)

A Certificate of Deposit is a secure way to save money at a bank or credit union. Unlike a regular savings account, you agree to keep your money deposited for a specific period, known as the term. In exchange, the bank pays you a fixed interest rate.

According to the provided reference, a certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years, and in exchange, the issuing bank pays interest.

Key Features of a CD

Here's a breakdown of what makes a CD unique:

  • Fixed Term: You choose how long you want to keep your money in the CD (e.g., 6 months, 1 year, 5 years).
  • Fixed Interest Rate: The interest rate is locked in for the entire term. This offers predictability.
  • Penalty for Early Withdrawal: If you withdraw your money before the term ends, you typically pay a penalty. This is to discourage early access to the funds.
  • FDIC Insured: CDs offered by banks are usually insured by the Federal Deposit Insurance Corporation (FDIC), protecting your money up to certain limits (currently $250,000 per depositor, per insured bank).
  • Higher Interest Rates: Typically CDs offer higher interest rates compared to regular savings accounts, reflecting the longer commitment.

Benefits of Using CDs

  • Guaranteed Returns: The fixed interest rate means you know exactly how much interest you'll earn.
  • Safe Investment: FDIC insurance provides a safety net.
  • Disciplined Savings: The penalty for early withdrawal helps you avoid dipping into your savings.

Example of a CD

Imagine you deposit $5,000 into a 1-year CD with an annual interest rate of 4%. You will earn $200 in interest after one year ($5,000 x 0.04 = $200). Your initial deposit plus the earned interest will be available at the end of the term.

CDs vs. Other Savings Options

Feature CD Savings Account
Interest Rate Generally higher, fixed Generally lower, variable
Access to Funds Limited; penalty for early withdrawal Easy access
Term Length Fixed No fixed term
Best For Savings goals with a specific timeline Short-term savings, emergency funds