Interest rates for CDs are currently higher than we've seen in years. Is it the right moment to invest in a certificate of deposit?

Often perceived as a relic of traditional savings, certificates of deposit (CDs) are experiencing a resurgence in popularity in today's favorable interest rate climate. With inflation easing and the Federal Reserve adjusting rates (with fewer cuts anticipated for 2025), the attractive returns may not last long.

If you're curious about CDs but unsure where to begin, you're in luck. Banking expert John Blizzard recently spoke with a financial leader to answer the most common inquiries about purchasing certificates of deposit. John serves as the CEO and President of Seattle Bank and leads CD Valet, a platform that connects consumers with financial institutions to compare and open CDs with competitive rates across the nation.

WHAT ARE CERTIFICATES OF DEPOSIT?

Financial Leader: Could you explain what CDs are and how they function?

John Blizzard: When you invest in a CD, you're placing your funds with a bank or credit union.

Your investment is usually insured up to $250,000 and is locked in for varying terms, such as two years, six months, or four years. You select the duration, and in return, you receive a guaranteed interest rate throughout that period.

Financial Leader: Why do CDs generally provide better interest rates compared to high-yield savings accounts?

John Blizzard: In a rising rate environment, CDs can offer substantial yields. Conversely, banks prefer liquid accounts since they anticipate rate drops, which leads them to quickly decrease your rates. High-yield savings accounts can be suitable if you anticipate needing immediate access to your funds.

WHO SHOULD CONSIDER CDS?

Financial Leader: There’s a buzz about high-yield savings accounts on social media, but what about CDs? Who benefits the most from them?

John Blizzard: CDs cater to a variety of savers. They’re perfect for “event savers” who won’t require their funds for 1-3 years, allowing them to secure a safe return at an attractive rate. Additionally, they appeal to retirees or those nearing retirement, typically aged fifty and above, as well as individuals who prefer a conservative approach to managing their finances.

BROKERED CDS VERSUS RETAIL CDS: WHAT'S THE DIFFERENCE?

Financial Leader: What sets bank CDs apart from brokered CDs?

John Blizzard: Retail CDs are acquired directly from banks or credit unions, while brokered CDs are obtained through brokerage firms. Brokered CDs carry market risks, much like bonds.

WHAT IF I NEED TO WITHDRAW MY MONEY EARLY?

Financial Leader: Once you deposit money into a CD, you commit to leaving it there for a set period. What happens if you need to withdraw it early?

John Blizzard: For retail CDs, you’ll know the penalty for early withdrawal. Typically, if you withdraw from a longer-term CD, you might incur a penalty equivalent to six months of interest. (Note: This means you forfeit six months of the interest you expected to earn upon signing the agreement.) Your principal remains intact. In the case of brokered CDs, if rates rise while you're locked in, you risk losing some principal.

Here’s a quick guide:

Retail CDs: Withdrawing early may cost you interest, but your principal stays safe.

Brokered CDs: Early withdrawal can risk your principal, depending on market rates.

WHEN IS THE IDEAL TIME TO PURCHASE A CD?

Financial Leader: Should you secure high CD rates now? What factors should you consider?

John Blizzard: Now is an excellent time to lock in favorable rates. We haven’t seen rates this advantageous in 15 years. As baby boomers age, many are shifting funds from the stock market into safer investments like IRAs and CDs.

HOW CAN I DISCOVER THE BEST CD RATES?

Financial Leader: We often check websites like Bankrate or NerdWallet for the best CD rates, believing we're accessing the top offers. But is that always accurate?

John Blizzard: Many online platforms showcase a limited selection of products. They may appear comprehensive, but they often feature listings from sellers who pay for visibility. Smaller community banks and credit unions frequently offer better rates, but they aren’t always visible online.

That’s why we established CD Valet. It allows these institutions to showcase their offerings, often providing better rates than large online banks or major banks that offer minimal returns.