3 things to know about CDs

when Inflation and emerging interest rate While it has generally been negative for most Americans to deal with, the news wasn’t all bad. Yes, for example, rates for mortgage purchases and refinances have risen significantly. But they are quick to jump for such products High yield savings And Certificate of Deposit (CD) That makes now an especially good time to pursue these options.

CDs, in particular, offer account holders a unique opportunity to both protect and grow their savings. But they don’t work like traditional savings accounts. To get the most value out of them, account holders must first understand a few important things. We’ll break down three important things to know about CDs in this article.

If you think you could benefit from opening a CD, start exploring your options here to see how much more you can earn.

3 things to know about CDs

Here are three important things to know about CDs.

Interest rates are high

CD interest rate tend to be higher than offered by traditional savings accounts. This is especially true in our current rate climate. The interest rate on a savings account is currently around 0.33% to 0.37%. But a CD’s interest rate now ranges from about 3.5% to 4.5% or more, depending on the lender. That means you’ll earn more money faster than putting your money in a CD instead of in a regular savings account.

How much more could you be earning? For example, let’s use $1,000. After 12 months in a regular account, you’ll have a total of $1,003.30 But with a CD, that $1,000 would grow to $1,035.00 at 3.5%. The higher the rate, the more you will make. You are essentially leaving money on the table by putting money into a regular account. By moving it to a CD, you can start earning more immediately.

So, check out your CD options here now and start earning more interest

Your interest rate is locked

Unlike high-yield savings account rates, which are adjustable and react to the market (favorably or not), CD interest rates are locked in when you open the account. So the rate at which you are protected when you open your CD will be the same rate at which your account matures regardless of what happens in the rate environment during the term of your CD.

Although this is usually favorable when the rate is high, as it currently is, the timing of opening a CD is important. Ideally, you should open an account when rates are high and you can earn as much interest as possible. But you also don’t want to wait too long and miss a window of opportunity.

It helps to pay close attention to the market and the overall rate environment and move forward from there. If you’re worried rates may rise again in the short term but don’t want to lose the benefit of opening an account now, you might want to split your savings into two CDs — one at the current rate and one at a higher rate down the line.

You may pay a penalty for early withdrawal

One reason banks and lending institutions offer higher interest rates for CDs is that the money is unavailable to the account holder until the CD matures. Account holders are essentially rewarded for keeping their money in one of these accounts with higher interest rates.

This doesn’t mean you can’t access your funds if you want. However, if you withdraw the CDs before the maturity date, there is a substantial penalty to pay. How much you pay depends on the lender and other factors, but it can be significant enough to wipe out all or most of the interest you’ve earned in the previous weeks and months. So be sure what you’re doing before putting all (or most) of your money into a CD.

Bottom line

Certificate of Deposit (CD) accounts are a smart way to both protect and grow your money. The interest rate is exponentially higher than what you can secure with a traditional savings account, and the rate is locked in for the life of the CD – regardless of any adverse rate activity during its life. That said, account holders should be careful how much they deposit into one of these accounts because they’ll likely pay a significant penalty if they choose to withdraw money before the CD matures.

You can learn more about CDs – and how much more you can earn – right here.