Are there different types of CDs?

With savings being top of mind, many customers are exploring certificate of deposit (CD) accounts to help their overall savings goals. While CD accounts might offer a way to earn interest on your deposits with some added stability, did you know there are numerous types of CDs to choose from? Some include traditional CD accounts, jumbo CDs, and step-up/bump-up CDs. Let’s take a closer look at the defining features of the many CD options out there to help you make an informed decision about where to put your money.

Comparing the types of CD accounts

Each CD is suitable for different goals and financial circumstances. Understanding their unique features and individual mechanics is the first step to help boost your savings with these potentially valuable financial tools. Keep in mind that not every financial institution offers every type of CD, so check with your bank or prospective financial institution to see what CDs they have available. Fully read and understand the fees and terms of any CD account you are interested in to ensure it fits with your savings goals.

Traditional CD

A traditional CD is your standard CD account. They have a fixed term period, such as six months, one year, five years or longer, with a fixed interest rate throughout the term period. Because the money is deposited in a CD for a fixed term, they often offer higher interest rates than traditional savings accounts.

Jumbo CD

A Jumbo CD is similar to your traditional CD, but typically with a higher minimum deposit requirement. Because of the larger deposit, financial institutions may offer higher interest rates than traditional CDs as well.

Liquid/No-penalty CD

A liquid, or no-penalty, CD allows you to withdraw your funds before the CD matures without penalties. For example, a bank may offer a liquid CD that provides penalty-free withdrawals any time after the halfway mark of the term period.

Step-up/Bump-up CD

Step-up and bump-up CDs are both CD accounts that allow you to increase the interest rate on the CD, should interest rates happen to rise during the term period. The main difference between the two is that with step-up, the interest rate rises according to a predetermined schedule set by the bank. A bump-up CD lets you choose when to request a raise in the interest rate, generally when CD rates have risen in the market. Check with your bank for specific details.

High-yield CD

Similar to a high-yield savings account, a high-yield CD typically offers a higher interest rate than a traditional CD. These are typically offered by online banks without the overhead of a traditional brick-and-mortar institution.

Add-on CD

An add-on CD is a certificate of deposit that allows the account holder to make additional deposits during the term of the CD. These CDs offer added flexibility but typically come with similar early withdrawal penalties.

Callable CD

A callable CD is a certificate of deposit that allows the bank to redeem the CD before it matures, usually after a certain predetermined date. When redeemed, the depositor is paid the principal and any accrued interest in full, but the account is closed. To compensate for this risk, a callable CD may offer a higher interest rate than some other types of CD accounts.

Which CD type is right for you?

CD options offer a variety of terms and features to meet different savings goals, and finding the right one for you can take some serious consideration. The right CD for you may be the one that aligns best with your financial goals and circumstances.

For instance, if you’re looking to achieve a short-term savings goal, a liquid or no-penalty CD may be a suitable option as it allows you to access your funds early without penalties. However, if you’re planning to save for a longer period, a traditional CD may be a better fit.

If you're looking to save for a specific purpose, such as a major milestone like buying a home or purchasing a car, an add-on CD may be a good option. These allow you to make additional deposits during the term of the CD, providing some flexibility in growing your savings.

At day’s end, while all CD options are potentially fruitful savings tools, it's important to consider which one aligns best with your savings goals and personal preferences. Understanding the terms and key features of the types of CDs you’re considering can help you make informed financial decisions.

In summary

As you can see, there are many types of CD accounts. From step-up CDs to liquid CDs, each one has the potential to help you reach savings goals. Consulting with your bank to see what CDs they have available and reviewing your own personal preferences may help you augment your savings with a brand-new CD account.