Shopping for a Certificate of Deposit

Finding the best certificate of deposit (CD) is only slightly less complicated than shopping for a new car. CDs have many variables, and some are as confusing as engine displacement and torque ratings. Get organized about your CD search now, so that you won't end up with a lemon later.

CDs are offered by online and traditional banks, savings and loans institutions, credit unions, and brokerage firms. In most cases, your deposit will be insured up to $100,000 by the FDIC. Double check this by asking your banker directly.

CD Variables

Start your comparison-shopping by creating a system to record the information you collect. You could use a handwritten chart or a spreadsheet with a column for each CD you want to compare. Ultimately, you'll want to review and compare the following six variables for each certificate of deposit:

• Minimum deposit. Typically, a higher minimum deposit requirement translates into a higher interest rate.

• CD term. CD terms vary from a week to several years. In a normal yield curve environment, longer terms usually mean higher interest rates. In recent months, however, short-term interest rates have been quite strong. You'll have to compare the differences between shorter- and longer-term rates to decide which period makes the most sense for you.

• Annual percentage yield (APY). CDs usually have a stated interest rate and an APY rate-a higher APY means more earnings power. Don't get distracted by the other rate provided-it doesn't take into account how often the interest is compounded and therefore should not be used for comparison purposes.

• Rollover policy. Before you lock your money into a CD, find out what your options are once it matures. Your options at rollover may be restrictive, particularly if you're working with an online bank.

• Early withdrawal penalties. Early withdrawal will prompt the bank to assess a penalty, thus reducing your yield.

• Account fees. The bank may also assess account fees; these too will reduce your yield.

You may not be able to test drive a certificate of deposit; but researching and comparing these variables is the next best thing.