Bank certificates of deposit accounts are a type of saving account that is virtually risk free. Bank CD accounts are insured by the FDIC which protects the principal invested in a CD up to a maximum limit per account holder. However, like any investment account, along with the benefits there can be hazards with bank CD investing. The biggest hazards with bank CD accounts are simple CD buyer mistakes in understanding what they are purchasing.
One of the most common bank CD buying mistakes is buying a CD with a term or date to maturity that is too long based on the investor’s time horizon. Since most bank CDs are fixed term and fixed interest rate investments, a longer term CD is fortunately, not subject to the risk of fluctuating principal investments. But, a long term CD is not a liquid investment and if the investor with a long term CD wants access to their funds prior to the maturity they will be subject to an early withdrawal penalty.
It is important that every bank CD investor understands the importance of the term of the CD or maturity date. The CD account agreement states that the money deposited in the CD remains in the CD throughout the term of the agreed time period. A bank CD account holder that wants to cash in their CD prior to the maturity can lose up to 6 months of interest payments that would have been earned on the CD as an early withdrawal penalty.
Some investors make the mistake of unwittingly investing in a CD with a call feature. Callable CDs work just like a standard bank CDs, however the issuer of this kind of CD has a call option which gives it the right to redeem or call the CD from the account holder for the full amount before the maturity date. The right to call the CD belongs to the issuer or bank and not the account holder.
A callable CD will usually be called when interest rates fall allowing the issuer to call the high rate CD and issue a new CD or borrow money for less than it’s paying on the CD it has called. This leaves the account holder that had the CD called forced to find a new place to invest their money, which will usually be at a lower interest rate.
A third common mistake made when buying bank CDs is not thoroughly comparing CD rates.
Certificate of deposit accounts usually have a higher interest rate than other savings instruments and CD investors have tendency to view the local bank CD rates comparing the options with just that bank or only other local banks. By not comparing bank CD rates in a wider region, investors are receiving far less than the highest CD rate that may be available. Before investing in CD with any bank, potential CD buyers should compare the best CD rates in their area as well as the highest national CD rates.
A final mistake with bank CD purchases is not understanding all of the terms and conditions with the bank CD. CD buyers need to know the minimum deposit requirement needed to obtain the posted CD interest rates, the penalty for early withdrawal, whether the CD account is a fixed rate and fixed term account and the renewal policies of the bank. It is a crucial step to take note and understand all the terms and conditions to avoid any mistakes investing in certificate of deposit account.
When you invest in any bank product there will be some risks no matter how small. Before putting your hard earned dollars in a new bank account, read and understand the terms of the bank product and compare the bank rates to insure you receive not only a safe and secure investment but the best return that is available.
State specific CD rates can be found at California CD Rates, Texas CD rates, New York CD rates, Florida CD Rates, Illinois CD Rates, Pennsylvania CD Rates, Ohio CD Rates, Michigan CD Rates as well as other states.
For more information on today’s best rates on CDs see Best Rates on CDs.
Tags: bank CD, bank CD rates, bank certificates of deposit, best CD rates, CD interest rates, CD investing, certificates of deposit, highest CD rate, National CD Rates
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