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What Are Certificates of Deposit? The Top 5 Questions People Are Asking

Haley Paskalides  |  December 18, 2024

Interest rates on CDs are hovering at a high we haven’t seen in years. So, is now the right time to buy a certificate of deposit?

Certificates of deposit (CDs) often get dismissed as “your parent’s savings plan”—safe but, let’s be honest, a little boring. But in today’s high-interest-rate environment, they’re making a strong comeback as a smart choice for short- and medium-term savings. With inflation cooling and the Fed cutting rates (with fewer reductions expected in 2025), these great returns won’t last forever.

Interested in CDs, but don’t know where to start? You’re in luck. Banking veteran John Blizzard recently sat down with HerMoney CEO Jean Chatzky to cover the top 5 questions he gets about buying certificates of deposit. John is the CEO and President of Seattle Bank and the CEO of CD Valet, an online marketplace connecting consumers to financial institutions to compare and open certificates of deposit with the best rates and terms nationwide.

WHAT ARE CERTIFICATES OF DEPOSIT?

Jean Chatzky: Tell us about CDs in general. What are certificates of deposit? How do they work?

John Blizzard: You invest your money as a consumer in a bank or credit union.

It’s typically insured up to $250,000 and that money is tied up for two years, six months, and four years, or more. You pick your term, but you get a fixed rate over that period of time. 

Jean Chatzky: Why do they generally offer better rates than you might get in a high-yield savings account?

John Blizzard: In a higher-rate environment, consumers can pick up a lot of yield on CDs. On the other hand, banks like liquid accounts because they expect rates to go down and they’re going to lower your rates quickly. So, they like you to be in high-yield savings accounts, and those can be appropriate in many situations if you need the money.

WHO ARE CDS FOR?

Jean Chatzky: We see a lot of influencers these days on TikTok touting the benefits of high-yield savings accounts, but not so much CDs. Who do you think certificates of deposit are really for?

John Blizzard: It really runs the gamut. [They’re good for] “event savers” who know they’re not going to need their money for 1-3 years, where you can lock in a very safe return at a good rate. Then you have the retired crowd (or the near-retired crowd), who are fifty-plus. Finally, you have the people who have saved their whole lives, who manage their own money, and who want to be very conservative with their money.

BROKERED CDS VS. RETAIL CDS: WHAT’S THE DIFFERENCE?

Jean Chatzky: When we hear about bank CDs versus brokered CDs, they’re totally different products. Where is the distinction? 

John Blizzard: Retail CDs are CDs you buy through your bank or credit union. Brokered CDs are CDs you buy through a brokerage firm. Brokered CDs are much more like a bond and you’re taking market risk. 

WHAT HAPPENS IF I NEED TO TAKE MY MONEY OUT OF A CD EARLY? 

Jean Chatzky: When you put your money in a CD, you agree that you are going to tie it up for a certain period of time to get the promised rate. What if you need to take out the money early?

John Blizzard: With retail CDs, you know exactly what the penalty might be [if you need to take the money out early]. So if it’s a longer-term CD, you might pay a six-month penalty of the interest. (Editor’s Note: In other words, you’d forfeit 6 months’ worth of what you were planning to earn in interest when you signed the contract.) Your principal doesn’t get touched. With brokered CDs, if you had a lower rate, and rates went up, you could lose principal. 

So, the shorthand guide here: 

Retail CDs: You may lose interest if you take the money out early, but you never lose principal.

Brokered CDs: You might lose principal if you take the money out early, depending on what interest rates are doing. 

WHEN IS THE BEST TIME TO BUY A CD? 

Jean Chatzky: ​​Is now the time that you want to lock in high CD rates? What are the considerations?

John Blizzard: Now is a terrific time to lock in really good rates. We haven’t had rates this good for 15 years. As boomers get older, a lot of them are rolling money out of the stock market, [and into more conservative investments like IRAs or CDs.]

HOW DO I FIND THE BEST CD RATES?

Jean Chatzky: We think that when we go to Bankrate, NerdWallet, or Forbes and search for the best rates on CDs, we’re getting the best rates on CDs… But in fact, we’re not always getting the best rates. Can you explain why that happens?

John Blizzard: You see it in all different types of products that are sold online, where [you search, but you’re not seeing] not the full market. They make it look like you’re getting the full picture of the marketplace, but they’re getting paid by the sellers of the products who are on there. The community banks and credit unions are just not seen digitally. 

That’s why we created CD Valet, to give those opportunities for the financial institutions to be seen, and quite often they offer the best rates. Almost every day, they offer a better rate than those large internet banks, let alone the big banks that pay almost nothing.

This story is in partnership with CD Valet. CD Valet is an online marketplace connecting consumers to financial institutions so you can compare and open CDs with the best rates and terms nationwide. Visit cdvalet.com to find the top CD rates so you can make more money on your money.

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