Certificate of Deposit: How Do CD Accounts Work?

What is a Certificate of Deposit?

A certificate of deposit (CD)  is a bank or credit union product that allows customers to earn high interest rates by leaving a lump-sum deposit untouched for a specified amount of time. Think of a CD as a long-term saving opportunity.

The length of a CD can vary, but anywhere between six months and five years is common. The minimum deposit is often $500. When it comes to CDs, there are a few terms you should know before diving in. The money you put into a CD is known as your principal. The length of the CD is its term, and the time it matures, or ends, is its date of maturity.

How to Choose a  CD

The interest rate and annual percentage yield (we’ll dive into this more later) determine how much you earn on a CD. Generally, a longer term will get you a higher rate or return on your investment. CD rates can also vary significantly year to year.

CDs are available through banks, including WesBanco, or credit unions. Visit your local branch to open a certificate of deposit account at WesBanco.

CDs vs. Savings or Money Market Accounts

CDs, savings accounts and money market accounts are all great options for saving and growing your money with interest. Each of them offers something different, so it’s important to understand the benefits of each before making your first deposit.

Savings accounts are usually the first account you open when starting your saving journey. When it comes to CDs vs. savings accounts, savings accounts are easier to open and initial deposits are much less. For example, a basic savings account may only require you to deposit around $50. They’re also more flexible, allowing access to your funds when you need them. Depending on the account, you may incur fees if your balance falls below a certain dollar amount. You will earn interest with funds set aside in a savings account, but not as quickly as a money market or CD.

Money market accounts are ideal for people who want to deposit a higher amount, watch interest grow quickly and have flexibility to access funds. When choosing a CD vs. a money market account, remember that money markets have checking account features like checks or a debit card. While CDs require you to keep funds untouched for a term, money markets allow you to withdraw funds for purchases.

Understanding CD Maturity

When a CD matures, you generally have a time limit to decide what to do with the money. If you wait too long, the bank usually rolls over, or reinvests, your money in another CD for the same term at the current rate.

If you would like to cash the CD, you can ask the bank to sweep or move the money into your accounts, transfer it to another bank, or send you a check.

Buying from a Broker

You can also buy a CD through a stockbroker, but you will likely have to pay some sort of fee or commission. You can usually sell a brokered CD without penalty if you need to get your money out early, but you may have to sell it for less than the principal you invested. Be sure that the brokered CD is insured before investing.

Caution Be very cautious about buying liquid CDs that claim you can make early withdrawals without fees. There are often restrictions that make these CDs less flexible than they appear.

Compounding is Key

What you actually earn on your CD is the yield— specifically the annual percentage yield (APY). The yield depends on whether the interest is simple or compound, and how often it’s compounded.

Simple interest is paid only on the principal you initially invested. Compound interest adds in the money that has been earned. To compare the two, try entering different amounts into the tool below.

Leveraging a CD Account for Business

WesBanco also offers CDs for business owners who want to grow their money for future purchases over a set period of time. Business CDs usually have terms between 3 and 60 months and remain in the account untouched until the term is up. It’s a beneficial long-term savings option that will continue to grow over time making that hard-earned money work even harder.

Content is for informational purposes only and is not intended to provide legal or financial advice. The views and opinions expressed do not necessarily represent the views and opinions of WesBanco.

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