Certificates of deposit, called CDs, are time certificates sold by banks. They are issued for a specific dollar amount for a specific amount of time. They are safe but with that safety comes a lower rate of return than what the stock market typically returns. If the stock market scares you right now and you want a safe place to park your money, CDs or money market funds may be for you. Today I discuss what to look for when choosing CDs. A marvelous site to check out and compare current interest rates and to get more information is http://www.bankrate.com.
Here is what you should look for when choosing CD interest rates:
- Compounding: Compound is better than simple. Daily is better than weekly which is better than monthly. For example, on a one year CD that pays 2% simple, your interest rate is 2%. But when it is compounded daily, that 2% yields 2.31% over the course of a year.
- Rollover rates: Be sure you will be notified when your CD is coming due. If not and you forget, it will be rolled over into another CD and the new rate may be a lower rate.
- Teaser rates: Some CDs offer high introductory rates and then drops. Be sure to ask how long the rate will be in effect.
- FDIC: Make sure your CD is FDIC insured.