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Pros and Cons of Certificates of Deposit

Higher interest rates have sparked renewed interest in CDs. Let’s take a closer look at the pros and cons of a certificate of deposit and some of the types of certificate accounts now available. We’ll also consider how the advantages and disadvantages of certificates of deposit add up for different types of investors.

What Is a Certificate of Deposit?

A certificate of deposit, or CD, allows you to earn interest on money by investing it for a fixed period of time in a special type of savings account. CDs—known as share certificates at credit unions—are offered by most banks and provide a no-risk return on investment on money you can afford to set aside for a specified period of time.

How do CDs work?

A CD savings account lets you invest money you do not currently need access to for a predetermined period (or term) of between three months and five years. In return, you are paid interest at a fixed rate or annual percentage yield (APY), with dividends paid and reinvested at predetermined intervals. The longer your term, the higher the APY you will be offered.

CDs are among the safest investments you can make, with both your principal and earnings fully insured by the federal government. This allows your money to earn higher interest than on other types of deposit accounts, but with almost zero risk of losing your money.

However, your money remains inaccessible for the CD term unless you pay a steep penalty to withdraw it.

What Is the Difference Between a Savings Account and a CD?

A CD is similar to a savings account in that it offers a safe place to stash money that you want to keep separate from the funds you need for day-to-day expenses and your monthly budget. It also offers the same very high levels of security as most savings accounts, with deposits of up to $250,000 fully backed by the FDIC (for banks) or NCUA (for credit unions).

CDs differ from savings accounts most significantly in the fact that you need to agree to invest your money by leaving it untouched in your account for an agreed-upon period of time, from just a few weeks to several years. Some banks or credit unions also offer CDs that differ in how often you can contribute to your principal during the investment period or how interest is accrued.

What Are the Pros of a CD?

CDs offer a safe and secure option to those looking to maximize predictability and certainty in their finances.

Low Minimum Deposit

You can open a CD with a deposit as small as $500. Most other short-term investments require a larger fee to offset the cost of setting up and managing your account.

Zero Risk

When you invest in a CD you are guaranteed not only a single, fixed rate of interest for the entire term, but your principal and the earnings you make on it are fully insured against loss.

Predictable Return

Unlike riskier investments, you’ll know at the start of your CD term:

  • Exactly how long your money will be invested
  • What APY you will earn
  • How often dividends will be reinvested

As a result, you’ll know exactly how much you will be paid out at the end of your CD’s term.

Fixed Interest Rate

Also unlike riskier investments, you’ll earn interest at the same fixed rate for the full term of your CD. This helps to shield your money from falling interest rates, lower stock prices, and deflation.

What Are the Cons of a CD?

At the same time, the certainty offered by CDs comes with some trade-offs.

Locked In

To be able to guarantee a higher interest rate, banks and credit unions require that your entire invested sum remain untouched until the CD’s maturity date. If you insist on accessing your money you will pay a significant early withdrawal penalty.

Low Interest Rates

CDs do beat the rock bottom interest rates offered by most checking and savings accounts, but still offer significantly lower returns than even relatively low-risk stocks or bond investments.


Rapidly rising inflation can sometimes outpace the relatively modest APYs offered by CDs. That means while your payout is predictable it might be worth less than you expect. Your fixed APY means you won’t benefit from it if interest rates rise as the economy heats up.


Earnings on your CD investment are fully taxable. If you are looking to invest a considerable sum, it might be wiser to look at investing in a retirement account or college savings fund.

What Different Kinds of CDs Are There?

It’s worth shopping around for your CD. Interest rates vary widely, especially when rates are higher. Credit unions and community banks, in particular, offer products tailored to the specific needs of many of their members.

For example, Credit Union of America offers members a choice of CDs:

  • The On-My-Terms Certificate costs just $500 to open and offers increasing APYs on terms between three months and five years. With dividends paid monthly for terms of a year or more, it’s a great place to start a savings nest egg for yourself or a loved one.
  • The 1-Year Add-On Certificate can be started with as little as $100 and allows you to add to this over a one-year term. It’s a good way to reward yourself for working hard to make your monthly budget stick.
  • The 30-Year Bump Certificate allows you to “bump” or step up your rate once to match the rate of Credit Union of America’s 24-month, making it a great risk-free place to start investing a sum of $2,500 or more, especially when interest rates are rising rapidly.
  • The Save To Win® Certificate allows you to get started with a deposit of as little as $25 and add to your investment over the full 12-month term, with the added incentive that every $25 balance increase qualifies you for a cash prize draw for up to $5,000.
  • Special Certificates are available for a limited time and offer special rates and terms.

Are CDs a Good Investment?

CDs are designed to provide a safe and predictable way to help people start saving or earn interest on relatively small amounts of money. They are a great choice if you are looking to set aside a nest egg or save up for something special but don’t want to take any risks with your hard-earned cash.

CDs are not a good investment if you think you will need access to your cash before your certificate matures. It might also not be a good choice if you are looking to earn cash on investments quickly or have a significant amount to invest. In this case, you might be better off talking to a financial advisor about building a properly diversified portfolio to spread your risk.

How Do I Open A CD?

Once you have found a CD you like, the process of opening your certificate account is easy and similar to opening a savings or checking account. In fact, you will almost always need to open a savings or checking account at your institution first.

You will also need to:

  • Contact your financial institution by phone, online, or by visiting in person
  • Provide one or two forms of identity
  • Have enough money available to make the minimum initial deposit

Come Home to Guaranteed Savings

At Credit Union of America we know how important setting aside those first few dollars is. That’s why we offer a range of innovative share certificate offers to help our members get started.

Our share certificates offer:

  • The discipline of a structured savings program
  • The security of a predictable payout
  • Innovative ways to add to your principal or boost your APY
  • Excellent rates and a wide range of terms

Whether you are looking to set aside just $25 or $2,500 or more, we have a product that will match your needs. Visit us today to open your account, or click below to find out more.


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