2012-07-31 / Columns

Fiscal Fitness

What Is A CD?
by Kara Gunderman
AVP/Sr. Community Bank Associate, OCB

One of the most popular savings choices at banks is called a CD, but it isn’t something you put in a computer or your car radio. A CD is a Certificate of Deposit, which is a contract between the saver and the bank.

When you open a CD, you deposit a specific amount of money (for example, $1,000) for a set amount of time (say, one year). The bank agrees to pay you a certain rate of interest for that time. At the end of the year, we say that your CD “matures.” You can either renew it at the current rate, or do something else with the money.

CDs usually pay higher rates of interest than other types of savings accounts, but they’re a little less flexible, because you agree to keep your money in the CD for that set amount of time. In most cases, you can take it out early, but you may lose part of your interest income.

Speaking of interest, CDs pay that in different ways. Some pay it each day, some each month, and others each year. How and when interest is paid affects how much you get, so it’s important to compare what’s known as the APY, or Annual Percentage Yield, when comparing CDs from different banks.

Another important point is that CDs issued by banks are insured (up to legal limits) by the FDIC, an agency of the federal government. CDs from other sources, such as brokerage firms, may not be insured.

© 2012 OCB. All rights reserved.

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