What Is a Certificate of Deposit? Understanding the Basics and Benefits

If you’re looking for a secure way to grow your savings, a certificate of deposit (CD) could be the right option for you. Whether you’re saving for a short-term goal or just want a low-risk place to park your money, a CD offers guaranteed returns with minimal risk. But what exactly is a certificate of deposit, and how does it work?

In this post, we’ll break down the basics of CDs—from the certificate of deposit definition to the certificate of deposit benefits, and even show you how to use a certificate calculator to maximize your earnings.

What Is a Certificate of Deposit?

A Certificate of Deposit (CD) is a type of savings account offered by credit unions and banks that earns interest over a fixed term. In exchange for depositing your money for a set period—anywhere from a few months to several years—the credit union or bank pays you interest. At the end of the term, you can withdraw your original deposit plus any interest earned.

Key Features of a Certificate of Deposit:

1. Fixed Interest Rates: The interest rate stays the same for the entire term, so you know exactly how much you’ll earn.
2. Term Length: Terms can range from a few months to several years, and generally, longer terms offer higher interest rates.
3. Low Risk: CDs are FDIC or NCUA-insured, depending on your financial institution, up to $250,000, meaning your money is protected by the federal government. If the bank or credit union where you hold your CD fails, the FDIC or NCUA guarantees you’ll get your deposit back, up to $250,000 per depositor, per financial institution.

How Does a Certificate of Deposit Work?

Understanding how a certificate of deposit works is simple but important. Here’s a step-by-step breakdown of how to open a certificate of deposit account:

1. Choose Your Certificate: Most credit unions and banks offer various certificate options. The certificate options at Sound Credit Union include Basic Certificates, Bump Certificates, Flex Certificates, and Jumbo Certificates. Each option has different benefits and use cases.
2. Submit Your Application: To open a certificate account, you’ll need to decide on your certificate type. You decide how much money you want to invest and for how long you’re comfortable locking it away. Typically, the longer the term, the higher the interest rate. After this is decided, you’ll need to submit an application for the chosen certificate.
3. Make an Opening Deposit: After your application is approved, you’ll need to fund the certificate with the minimum deposit required for the chosen certificate type.
4. Earn Interest: The credit union or bank will pay you interest over the course of the term, and the rate is fixed, so you’ll know exactly what you’ll earn.
5. Maturity: Once the CD matures, you can withdraw your original deposit plus the interest earned—or reinvest it in another CD.

That’s it! You deposit your money, earn interest, and wait until the term is over. If you have any questions on this process or your options, contact Sound Credit Union, or stop by a local branch.

Certificate of Deposit Benefits

There are several reasons why certificates of deposit are a great option for savers:

• Fixed Term: When you open a CD, you can choose a predetermined term between 3 and 60 months. This provides a sense of stability and predictability for your investment, as you know exactly how long your money will be tied up and what interest rate you’ll receive.
• Safety: One of the key advantages of a CD is the option to make additional deposits during the term. This flexibility allows you to increase your savings and maximize your returns, especially if you’re able to deposit extra funds during the life of the certificate.
• Security: Certificates are considered low-risk investments. Providing peace of mind and protecting your funds.
• No Market Risk: Unlike stocks or mutual funds, the value of your CD isn’t affected by market fluctuations. This makes it a safe option for those who want stable, predictable returns

Understanding Certificate of Deposit Rates and How They Impact Your Investment

Certificate of deposit interest rates are key when it comes to how much you’ll earn. The higher the rate, the more your money grows over time. Here’s a quick breakdown:

• Best Certificate of Deposit Rates: The best rate on a certificate of deposit can often be found at credit unions. As not-for-profit organizations, credit unions return their profits to their members in the form of competitive interest rates.
• Certificate of Deposit Typical Rate: Interest rates will vary depending on the term length and the financial institution. Generally, longer-term CDs offer higher rates.
• High-Yield Certificate of Deposit: High-yield CDs tend to offer the best rates, but they usually come with higher minimum balance requirements or longer terms.

How to Use a Certificate of Deposit Calculator to Maximize Your Earnings

Not sure how much you could earn with a CD? Use Sound Credit Union’s certificate calculator to help you estimate your returns based on your deposit amount, the term length, and the interest rate.

Here’s how to use a CD calculator:

1. Enter Your Deposit Amount: Input the initial amount you plan to invest.
2. Select the Term Length: Choose how long you want to keep your money in the CD.
3. Input the Interest Rate: Use the rate offered by your credit union or bank
4. View Your Results: The calculator will show you how much interest you’ll earn and the total value of your investment at maturity.

This tool is a great way to understand your potential earnings and make more informed decisions. If you have questions on your results, contact Sound Credit Union today.

Certificate of Deposit: Minimum Balance Requirements

Most financial institutions require a minimum deposit to open a CD. Here’s a general idea of what to expect:

• Certificate of Deposit Typical Minimum Balance: The minimum deposit for a standard CD is typically between $500 and $2,500.
• High-Yield Certificate of Deposit: These CDs may require a higher minimum deposit, often around $5,000 or more.
• No-Minimum CDs: Some banks and credit unions offer CDs with no minimum deposit requirement, but these often come with lower interest rates.

Be sure to check the minimum deposit requirements at your chosen credit union or bank before committing to a CD.

Explore Your Options With Sound Credit Union

Ready to explore your certificate of deposit options? Sound Credit Union is here to help! Our experienced team is available to answer any questions, assist with your application, and help you get started on the right foot.

Contact Sound Credit Union today to discuss your certificate of deposit options and find the perfect fit for your financial goals.