How to Choose the Right CD

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Step 1

Determine the reason for needing a CD. Is it an emergency fund? Will it be used in the next year or two for a big purchase? Or perhaps it’s money to be held for several years. Knowing the purpose will help you determine how long you need the money set aside.

Step 2

Next, identify the soonest you’ll need access to the money. An emergency fund could be needed at any time. Or, in the case of a big ticket item, figure out the earliest date you’d possibly be willing to make the purchase. This date will be your desired maturity date.

Step 3

Visit a number of banks or credit unions, either in person or online, to compare products. Longer maturity periods generally return higher interest, but the trade-off is a forfeiture of some of the accrued interest as a penalty for early withdrawal if you need the money before maturity.

Step 4

As with anything, consider the reputation and financial health of whatever institution you choose. CDs are covered by FDIC insurance but can be tied up for awhile if the bank fails.

Step 5

Finally, understand that rates change periodically. The bank or credit union you choose today may not offer the best deal when it comes time to renew your CD. Taking a few moments to shop around before renewing will ensure that you always have the best deal available.

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