The certificate of deposit
One way consumers have long created debt relief is by putting their money into certificates of deposit, or CDs. A CD is an interest-bearing account that promises a return on investment if the customer leaves the full amount of funds in the account for a specific amount of time.
CDs can be a convenient way to grow your money, if you know what to look for. Here are some of the basics.
The Basic CD
Banks will have various terms for their CDs. For example, there are 3-month CDs, 6-month CDs and even up to 24-month CDs. There will also be minimum deposits, normally $500, $1,500 and up to $50,000.
You agree to leave your money tied up in the account until the maturity period is over, in return for an interest rate. The longer you agree to leave your funds in the account, the higher the interest rate available to you will be. CDs are covered by the FDIC and insured up to $250,000 per person, per bank.
There are many places to find CDs. One great resource is Bankrate.com. You can quickly do a comparison of available rates and funding requirements to see which one works best for you. MoneyAisle.com is another online resource, but at this web site you can let businesses compete for your funds in an auction-styled bidding process.
Questions to ask
Just like with any financial product, there are some basic questions to ask with CDs. Here are some things you want to know before depositing your money.
- Is the interest rate fixed?
- How long are the terms?
- What penalties are there if you withdraw the money before the maturity date?
- Is the CD “callable”, meaning can the bank return your money prior to the maturity date, if it wants to?
- How is interest paid to you? Some banks choose to automatically reinvest money unless otherwise directed.
- How often is interest paid out?
These are all very important questions. For example, if the bank has an automatic roll-over policy where your money reaches its maturity and you miss the grace period, you may end up reinvesting for another year unknowingly. Normally banks send letters stating if they don’t hear from you within a 7-14 day period the CD will automatically reinstate. Be sure to know if this is the case with your bank. If you’re using the CD to raise money for debt relief, you want access to the money when your bills come due, without penalty points.
A brokered CD is one that is sold by a brokerage firm. These are moneys that are pooled from various investors and then reinvested into FDIC-insured CDs. The advantage is that these brokerage firms may have access to better rates if the firm is bringing a high amount of funds.
Rene Kim, vice president of Charles Schwab, stated that another advantage is “you can keep multiple CDs of different maturities in one account … and if you have a good amount of money, you can place it with different banks to stay under the FDIC $250,000 limits.” One warning here is to make sure the brokerage firm isn’t using the same bank you are. This could potentially put you over the quarter-million dollar limit.
CDs are a good saving option if…
CDs are a great way to save up extra cash if you know the need for the cash won’t be there in the immediate future. There are penalties that can eat away at any interest return and even the principal if you’re not careful.
If used properly, however, CDs can build money for you and provide debt relief sooner. Be wise and do research, but then enjoy the benefits of this government-backed investment.