Nine FDIC Tips When Purchasing CDs

Much of the focus at MoneyRates.com is about shopping for competitive bank rates when choosing CDs or other deposit products. However, there are other factors that go into these decisions, and it is important not to overlook the basics. This is especially true when choosing CDs, because they can lock you into the product for months or years.

CD Buying Advice from the FDIC

The Federal Deposit Insurance Corporation (FDIC) offers nine tips for people buying CDs. Here is a summary of those tips:

1. Know your maturity date. The length of commitment is key because CDs lock the purchaser into certain conditions for that term, most notably CD rates. Make sure you view the final terms in writing.
2. Identify the issuer of brokered CDs. If you are buying a CD through a third party, be sure you know who the actual issuer of the CD is. This can help you confirm FDIC coverage and avoid inadvertantly exceeding FDIC insurance coverage limits with any one institution.
3. Understand call features. Call features are a one-way option--they allow the bank to terminate the CD before maturity, but they don't give you the same privilege. Thus, while you might assume that buying a CD means locking in CD rates for a specified period of time, if market CD rates fall, you might find that the bank will exercise its option to terminate the CD. Avoid call features, or at least make sure you thoroughly understand them.
4. Understand the difference between call features and maturity. To eliminate any confusion, ask for two things in writing: the date on which the CD will mature, and the earliest possible date when it could be called by the issuer.
5. Confirm details on CD rates. You should receive a disclosure document which confirms the CD rate. You should also establish how frequently the interest is compounded and whether the interest will be credited to your account or paid to you directly.
6. Establish whether CD rates are fixed or variable. The common assumption is that CD rates are fixed, but some products include provisions for changes in the rate from time to time. Make sure terms governing changes in the CD rate are acceptable to you.
7. Identify penalties for early withdrawal. Chances are you will have to pay something to withdraw from the CD before its maturity date, but the lower the penalty, the more flexibility you'll have should CD rates rise or you encounter an unexpected need for the money.
8. Understand limitations on reselling brokered CDs. A brokered CD may be advertised as having no fee for early withdrawal, but this may be predicated on the broker being able to resell your CD. If market CD rates have declined, your CD may have to be sold at a loss--likely leaving you penalized for early withdrawal.
9. Identify any additional features. An example of an additional feature might be a death benefit, which would allow your heirs to redeem a CD early without penalty upon your death. These may not be the central terms determining your choice of CDs, but they could be good tie-breakers between otherwise equal CDs.

For more information, see the full article on these tips at the FDIC's website.

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