Profit by Choosing Your CD Wisely

Certificates of deposits (CDs) come in many shapes and sizes. To make the most out of your savings dollars, it pays to learn the available options.

All CDs require that you leave your money invested for a specified period of time. That's a small price to pay, however, for the benefit of higher interest rates. In general, the more you invest and the longer the term, the more money that you'll earn.

Types of CDs

CDS come in a variety of styles. Here are a few types to choose from.

Traditional: Traditional CDs pay a pre-determined interest rate. Your deposit earns a fixed amount of money over a specific term. However, there are stiff penalties for early withdrawal.

Callable: The bank can call (redeem prior to maturity) this type of CD if interest rates drop. There are restrictions on how soon the bank is allowed to do this and reissue a new one at a lower rate. The callable CD's advantage is that the initial interest rate will be higher than that of a traditional CD.

Brokerage: A CD issued by a brokerage company rather than a bank or credit union often pays a higher interest rate. However, you'll have to have an account there to be eligible.

Bump up: Bump-up CDs allow you to request an adjustment in the interest rate. This is something that you might consider if rates begin to rise. There's always a price to pay, though: the initial interest rate may be lower than the rate on a traditional CD.

Liquid: You can withdraw money from a liquid CD during the term without penalty. What's the trade-off? With a liquid CD, the interest rate will be lower than that on a traditional CD. There also may be limits on when you can take the money and how many times you can do it.

A CD is a great savings account if you don't need your money at a moment's notice. Once you understand the choices, you can choose the one that most aligns with your financial situation.