A Certificate of Deposit (CD) account is a type of savings account offered by banks and credit unions where you deposit a fixed amount of money for a predetermined period, known as the "term," which can range from a few months to several years
. In return, the bank pays you a fixed interest rate, typically higher than that of regular savings accounts, providing a predictable and secure way to grow your savings
. Key features of a CD account include:
- Fixed term: You agree to keep your money deposited for a set time period, such as 6 months, 1 year, or even up to 10 years
- Fixed interest rate: The interest rate is locked in for the term, so you know exactly how much you will earn
- Early withdrawal penalty: If you withdraw your money before the term ends, you usually pay a penalty that can reduce your earned interest significantly
- FDIC or NCUA insurance: CDs are insured up to $250,000 by the FDIC for banks or by the NCUA for credit unions, making them a low-risk investment
- Interest compounding: Interest is often compounded daily and paid monthly, quarterly, or at maturity
CDs are commonly used for short to medium-term savings goals, such as saving for a home down payment or a vacation, and they encourage disciplined saving by restricting access to the funds until maturity
. Some banks offer variations like "bump-up" CDs that allow a one-time interest rate increase or CDs linked to market indices
. In summary, a CD account is a low-risk, fixed-term investment that offers higher interest rates than regular savings accounts in exchange for locking your money away for a specific period
