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How Do Certificate of Deposit Interest Rates Work

CD interest Rates–Introduction

CDs are great investments for people who want to see their money grow over time. In the days of the recession and the stock market crash, people want to invest their money in a source that guarantees a return. No one wants to gamble their money away by placing their money in investment opportunities that may decrease their money over time. Knowing about CD interest rates is the best way to ensure that money grows.

How Do CD Interest Rates Work

When customers decide to invest their money into a certificate of deposit (CD), the bank or credit union provides them with a paper certificate or bankbook as proof of their investment. The CD owners also receive periodic statements that show the progress of their investment. Most of the time, financial institutions offer their highest rates to the customers investing the largest amounts of money with later maturity dates. These financial institutions offer the option to compound the interest or receive the interest on a regular basis. Many customers chose compounded interest because they receive a little more money with this option. Those who invest large amounts of money may instead choose to get the interest deposited automatically into an account.

As CDs approach the maturity date, the financial institution presents the option to roll over or withdraw the money from the CDs. Withdrawing the money guarantees the investors the amount of money that they put in the CDs plus interest. Withdrawing funds before the maturity date may cost the investors a few months of interest. Many choose to roll over the amount to CDs with a longer maturity date. This is the time that investors can add more money to the CDs before committing to a maturity date.

How Certificate of Deposit CD Interest Rates Are Calculated

Financial institutions calculate CD rates bases on two factors: current rate environment and CD maturity.

  • The current interest rates on the market are a huge determining factor in the rates that financial institutions offer. They set their rates according to the competitive rates of others. Banks and credit unions take into consideration that customers have a variety of choices to invest their money so it is necessary for them to compete appropriately. Customers should pay close attention to CD rates before they invest their money.
  • Another factor in CD rates is the maturity date. The longer the money remains in a financial institution, the better the rates those customers receive. Rates increase as the length of time the money is invested increases. Longer maturity dates allow the banks to have a greater amount of flexibility with customers’ money, and they offer the best rates to customers for this reason. It is a good ideas that customers leave their money in CDs for the longest length of time offered to see the greatest amount of gain to their investments.

What Determines a Certificate of Deposit CD Interest Rate?

There are other less significant factors than those stated above that can determine the rates that customers receive, including:

  • Businesses that want more short-term business may offer better CD rates. Many customers shop around for the best rates, and this decision may help the banks that they choose. The banks may increase their rates so that they are higher than the market rate. Wise customers will jump on this financial opportunity. The bank is happy to receive their business because the customers may move additional assets to their bank along with the CDs that they open.
  • Financial institutions may offer higher rates to receive higher margins of return. Organizations like credit unions can afford to offer slightly higher rates because they are nonprofit organizations. If they decide that they want to increase their profit by a certain amount, they may use their CD rate offers to accomplish this goal. Going with a credit union may offer customers an opportunity to gain more money on their investment while earning the credit union more money as well.

Buying CDs in bulk may be a great strategy to increase customers’ profit. Instead of buying smaller CD amounts at various financial institutions, customers should invest their money in one CD to get the best rates. Shop around to decide if it is better to consolidate the CDs into one large CD. CDs are always going to be a good investment option for those looking for a safe way to invest. Do not rush to sign up for the first rate available. Customers should hold out for the best rates available.

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