How to compare CD rates

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The internet has made it easier than ever to compare CD rates. CD rates can be found online today, updated daily. With that data at your fingertips, it can be a relatively simple matter to choose the highest CD rates. However, while identifying the highest CD rates is important, there is a little more you should know before you choose a CD.

What is a CD?

A CD is a certificate of deposit, which amounts to an agreement between you and the financial institution in which the amount of money you deposit, the amount of time you will leave it with the bank and the interest rate the bank pays are all specified.

Your deposit is a general obligation of the financial institution, meaning it depends on the overall ability of that institution to pay you as promised. CDs are often backed by federal insurance, but this is a feature you should get confirmed in writing.

Your part of the obligation is to leave the deposit with the institution for that specified time period, or else pay a penalty for early withdrawal.

Why timing is crucial for CD Rates

Because of that early withdrawal penalty, timing is important when choosing a CD. Be sure not to lock up your money for any longer than you can afford to go without it. At the same time, since longer-term CDs tend to have higher rates, in general you should choose the longest CD you can within the time frame of when you will next need the money -- unless you expect interest rates to rise during that time. In that case, a shorter term could make sense.

The fact that longer-term CDs have higher rates is important to remember when you compare CD rates. Don't start by choosing the highest CD rates. First decide on what time frame suits you, and then compare CD rates for that time period.

Quality and other considerations

There are some other considerations you should take into account when you compare CD rates:

  • Quality of the institution. Bank failures do occur, so research the bank you're considering before starting an account. Do an online search for negative articles, and if the institution is a public company, check to see if its stock has had an unusual dive.
  • Insurance backing. Bank CDs that have Federal Deposit Insurance Corporation (FDIC) backing are insured for up to $250,000 per institution per depositor, which can be very reassuring -- unless you have total deposits of greater than that amount with the same bank. Credit Union CDs may or may not have federal backing, and if so, it may be in a smaller amount.
  • Call features. Some CDs have what are known as "call features," which allow the issuer to terminate the CD early at its discretion. This means that if interest rates fall, you may lose the higher rate you thought you had locked in with the CD. If possible, avoid call features.

A sensible way to compare CD rates is to first make sure the CDs you're reviewing have a similar time frame, call features and insurance backing -- and only then choose the highest rate.

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