Who Can Issue Certificates of Deposit?


In the world of personal finance, there are some products that are highly specialized, custom tailored to an individual’s needs and available only through certain types of financial institutions. Certificates of deposit, or CDs, are not one of those products. You can buy a CD just about anywhere financial products are sold, but there are some key differences you’ll want to watch out for.

Key Insights

  • Nearly every commercial bank in the U.S. offers customers some kind of certificate of deposit.
  • Credit unions can also be a source of CDs.
  • Brokerage firms often sell “high-yield” CDs, although there are some potential risks involved.
  • As with any type of investment, CD shoppers should compare rates and terms, particularly any penalties for early withdrawal.

What is a Certificate of Deposit?

A certificate of deposit (CD) is a financial product that locks in your money for a certain period of time in return for a higher interest rate than you could get on a regular savings or checking account. Over the course of its term, whether that’s just a couple months or up to 10 years or more, the CD will accrue interest, either at a fixed or variable rate. You’ll receive your original investment back, along with the interest, when the CD reaches maturity. At that point you can take out the cash or use it to buy another CD.

Where to Buy Certificates of Deposit

Certificates of deposit are widely available at banks and other financial institutions, both online and off.

Commercial Banks and Credit Unions

Given the relatively simple nature of a certificate of deposit, it’s no wonder that most banks offer at least one or more varieties of them to their customers. For example, Investopedia’s regularly updated Best Bank CD Rates listings track close to 200 brick-and-mortar banks, internet divisions of traditional banks, and online-only banks that sell CDs.

CDs come in a variety of forms, and not all banks or credit unions may offer every type. CDs can vary by term (from months to years), interest rates, and minimum deposit requirements. They may also have different early-withdrawal penalties, should you need to take your money out before the term ends. For those reasons it makes sense to shop around and not simply assume that your regular bank or credit union offers the best deal.

Though their offerings will vary, a major benefit of going with a bank or credit union’s CD offerings is the insurance protection they typically provide, from either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). If your bank or credit union is federally insured by one of those agencies, your total deposits at that institution (including your CDs and another accounts) will be insured for up to $250,000. Technically, that $250,000 maximum is per depositor, per financial institution, and per ownership category, so if you have more than $250,000 you want to keep in the bank you can structure your accounts in a way that will multiply your insurance coverage. For example, you could open both individual and joint accounts.

Important

Once your CD’s term is close to ending, you will have to tell the bank how you want to proceed. Otherwise the bank may simply roll your funds into another CD, locking it in for another term.

Brokerage Firms and Independent Sales Representatives

In addition to banks and credit unions, you can also buy CDs through many brokerage firms and independent sales representatives, commonly referred to as “deposit brokers.” They typically negotiate a higher interest rate with a bank in return for bringing in customers. That way they are able to offer brokered CDs, with attractive interest rates. These products are sometimes advertised as high-yield CDs.

Though traditional CDs typically mature in 10 years or less, brokered CDs can come with significantly longer terms, with some reaching 30 years. That doesn’t mean, however, that your money will necessarily stay locked away for that long. Since brokered CDs can often be sold on the secondary market, you can try to sell your CD to another investor. You will probably have to pay a sales fee, and you may lose money if interest rates on new CDs have risen since you bought it.

Brokered CDs may or may not be covered by FDIC or NCUA insurance. That makes it all the more important that you buy a brokered CD only from a reputable firm.

What Is a Callable CD?

A callable CD is one that allows the issuer to terminate the CD before its term ends. The issuer might “call” your CD if interest rates drop substantially, so that it doesn’t have to keep paying you a higher rate. According to the Securities and Exchange Commission, if that happens, “you should receive the full amount of your original deposit plus any unpaid accrued interest.”

How Does Laddering Work With CDs?

Laddering is an investment technique in which you buy several CDs of varying maturities rather than a single CD. That way you avoid the risk of having to reinvest all of your money at the same time, possibly when interest rates are low. Plus, if interest rates are rising, you will be able to reinvest the money from the CD that matures next to take advantage of those higher rates. This is often referred to as a CD ladder.

Are CDs Good Investments?

CDs are good investments in the sense that they can be a very safe place to keep your money. However, they don’t offer the potential returns of stocks or many other investments. Of course, those investments also carry greater risks that you may lose money. Investing in CDs doesn’t have be an all-or-nothing proposition. You can invest a portion of your money in CDs for safety and another portion elsewhere for potentially higher returns.

The Bottom Line

Certificates of deposit are available from many sources, including most banks and credit unions. Higher-yielding CDs are also available through brokerage forms, but they may not provide the safety net of Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) insurance.



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