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Home > Consumer Protection > Banking & Your Money > Certificates of Deposit: Tips for Savers

Certificates of Deposit: Tips for Savers

Investors searching for relatively low-risk investments that can easily be converted into cash often turn to certificates of deposit (CDs). A CD is a special type of deposit account with a bank or thrift institution that typically offers a higher rate of interest than a regular savings account. Unlike other investments, CDs feature federal deposit insurance up to $250,000.

Here’s how CDs work: When you purchase a CD, you invest a fixed sum of money for fixed period of time – six months, one year, five years, or more – and, in exchange, the issuing bank pays you interest, typically at regular intervals. When you cash in or redeem your CD, you receive the money you originally invested plus any accrued interest. But if you redeem your CD before it matures, you may have to pay an "early withdrawal" penalty or forfeit a portion of the interest you earned.

Although most investors have traditionally purchased CDs through local banks, many brokerage firms now offer CDs. These brokerage firms – known as "deposit brokers" – can sometimes negotiate a higher rate of interest for a CD by promising to bring a certain amount of deposits to the institution. The deposit broker can then offer these "brokered CDs" to their customers.

At one time, most CDs paid a fixed interest rate until they reached maturity. But, like many other products in today’s markets, CDs have become more complicated. Investors may now choose among variable rate CDs, long-term CDs, and CDs with special redemption features in the event the owner dies.

Some long-term, high-yield CDs have "call" features, meaning that the issuing bank may choose to terminate – or call – the CD after only one year or some other fixed period of time. Only the issuing bank may call a CD, not the investor. For example, a bank might decide to call its high-yield CDs if interest rates fall. But if you’ve invested in a long-term CD and interest rates subsequently rise, you’ll be locked in at the lower rate.

Before you consider purchasing a CD from your bank or brokerage firm, make sure you fully understand all of its terms. Carefully read the disclosure statements, including any fine print. And don’t be dazzled by high yields. Ask questions – and demand answers – before you invest. These tips can help you assess what features make sense for you:

Find Out When the CD Matures – As simple as this sounds, many investors fail to confirm the maturity dates for their CDs and are later shocked to learn that they’ve tied up their money for five, ten, or even twenty years. Before you purchase a CD, ask to see the maturity date in writing.

For Brokered CDs, Identify the Issuer – Because federal deposit insurance is limited to a total aggregate amount of $250,000 for each depositor in each bank or thrift institution, it is very important that you know which bank or thrift issued your CD. In other words, find out where the deposit broker plans to deposit your money. Also be sure to ask what record-keeping procedures the deposit broker has in place to assure your CD will have federal deposit insurance. For more information about federal deposit insurance, read the FDIC's publication Your Insured Deposits or call the FDIC's Central Call Center at (877) 275-3342 or (877) ASK-FDIC. For the hearing impaired call 1-800-925-4618 or 1-703-562-2289 (7:00 am to 7:00 pm Eastern time)

Investigate Any Call Features – Callable CDs give the issuing bank the right to terminate the CD after a set period of time, but they do not give you that same right. If the bank calls or redeems your CD, you should receive the full amount of your original deposit plus any unpaid accrued interest.

Understand the Difference Between Call Features and Maturity – Don’t assume that a "federally insured one-year non-callable" CD matures in one year. If you have any doubt, ask the sales representative at your bank or brokerage firm to explain the CD’s call features and to confirm when it matures.

Confirm the Interest Rate You’ll Receive and How You’ll Be Paid – You should receive a disclosure document that tells you the interest rate on your CD and whether the rate is fixed or variable. Be sure to ask how often the bank pays interest – for example, monthly or semi-annually. And confirm how you’ll be paid – for example, by check or by an electronic transfer of funds.

Ask Whether the Interest Rate Ever Changes – If you’re considering investing in a variable-rate CD, make sure you understand when and how the rate can change. Some variable-rate CDs feature a "multi-step" or "bonus rate" structure in which interest rates increase or decrease over time according to a pre-set schedule. Other variable-rate CDs pay interest rates that track the performance of a specified market index, such as the S &P 500 or the Dow Jones Industrial Average.

Research Any Penalties for Early Withdrawal – Be sure to find out how much you’ll have to pay if you cash in your CD before maturity.

Ask Whether Your Broker Can Sell Your CD – Some brokered CDs are issued in the name of the "custodian" or deposit brokers. In some cases, the deposit broker may advertise that the CD does not have a prepayment penalty for early withdrawal. In those cases, the deposit broker will instead try to resell the CD for you if you want to redeem it before maturity. If interest rates have fallen since you purchased your CD and demand is high, you may be able to sell the CD for a profit. But if interest rates have risen, there may be less demand for your lower-yielding CD. That means you may have to sell the CD at a discount and lose some of your original deposit .

Find Out About Any Additional Features – For example, some CDs offer a death benefit that allows a CD owner’s heirs to redeem the CD without penalty when the owner dies.

The bottom-line question you should always ask yourself is: Does this investment make sense for me? A high-yield, long-term CD with a maturity date of 15 to 20 years may make sense for many younger investors who want to diversify their financial holdings. But it might not make sense for elderly investors.

If you have a complaint about a CD you purchased through a bank, try to resolve your complaint directly with an officer of the bank before involving an outside agency. Financial institutions value their customers and most will be helpful. If you are unable to resolve the matter with the financial institution, use the following guidelines to determine where to direct your complaint.

If your complaint is against a salesperson who represents a third-party investment firm, call the number below for instructions on where to write:

Financial Industry Regulatory Authority
(formerly The National Association of Securities Dealers (NASD))
(301) 590-6500
Internet: http://www.finra.org/index.htm

If your complaint or inquiry is about a specific financial product or investment, contact:

Securities and Exchange Commission (SEC)
Office of Investor Education and Assistance
450 5th Street, NW
Mail Stop 11-2
Washington, DC 20549
(202) 551-6551 or
(800) SEC-0330
Internet: http://www.sec.gov
E-mail: Help@sec.gov

If your complaint is about a financial institution or an employee of the financial institution, contact one of the federal agencies listed below. 

If the financial institution is a state-chartered bank and not a member of the Federal Reserve System, contact:

Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
(877) 275-3342 or (877) ASK-FDIC
For the hearing impaired call 1-800-925-4618 or 1-703-562-2289 (7:00 am to 7:00 pm Eastern time)
Internet: http://www.fdic.gov
Online Customer Assistance Form: http://www2.fdic.gov/starsmail/index.html

If the financial institution is a national bank, contact:

Comptroller of the Currency
Customer Assistance Group,
1301 McKinney Street, Suite 3450
Houston, TX 77010
(800) 613-6743
Internet: http://www.helpwithmybank.gov/

If the financial institution is a state-chartered member of the Federal Reserve System, contact:

Board of Governors of the Federal Reserve System
Division of Consumer and Community Affairs
20th and C Streets, NW
Washington, DC 20551
(202) 452-3693
Internet: http://www.federalreserve.gov

If the financial institution is a thrift or a savings institution, contact:

Office of Thrift Supervision
Consumer Affairs
1700 G Street, NW
Washington, DC 20552
(202) 906-6237
(800) 842-6929
Internet: http://www.ots.treas.gov/


FDIC Central Call Center
(877) 275-3342 or (877) ASK-FDIC
For the hearing impaired call 1-800-925-4618 or 1-703-562-2289
(7:00 am to 7:00 pm Eastern time)  

FDIC on the Internet
Internet: http://www.fdic.gov

Or for Customer Assistance

The above information is intended to be presented in a nontechnical way and is not intended to be a legal interpretation of FDIC regulations and policies  

Last Updated 10/04/2008 starsmail@fdic.gov

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