Certificates of deposit (CDs) are a popular way to save toward important goals—like a down payment on a house, your child's college tuition, planned home maintenance and repair expenses, and more. But before opening a certificate of deposit, you should first understand how CDs and CD rates work.

What Is a Certificate of Deposit?

A CD is a time deposit. When you open a CD, you agree that you will not withdraw the funds until the maturity date, which varies from a few months to several years after you open the account, depending on the term you choose. You can close a CD before the term ends, but you typically will pay an early withdrawal penalty for doing so. Once the CD reaches the maturity date, you can withdraw your money (principal and interest), open a new CD or simply renew your CD.

CD Rates

As you've no doubt discovered, CD rates vary from bank to bank. CD rates usually depend upon the term of the CD, and comparison shopping is critical to getting the best possible rate for the term you want. As a general rule you can expect to find that the longer the term of the CD, the higher your rate will be. However, while comparison shopping based on the rate is an important first step, it's also important to look at:

  • The term. Because CDs with longer terms tend to have higher rates, it makes sense to carefully consider how long you'll keep your money deposited. It may be worth the short-term sacrifice of access to your funds if it means getting better rates when you opt for a longer-term CD.
  • The requirements. Be sure you understand opening deposit requirements and term requirements.
  • The fees. Generally speaking, you don't have to worry too much about fees with CDs. It is important, however, to know what the early withdrawal penalty is, even if you don't think you'll have to make a withdrawal before maturity. Some banks, including Ally Bank, offer a "no-penalty CD" option. The Ally Bank No Penalty CD allows you to withdraw all your money, including interest earned, without penalty, any time after the first six days following the date you fund your CD.
  • Interest compounding. Banks compound your interest daily, monthly, quarterly, or even annually. More frequent compounding helps your balance grow faster, so look for daily compounding interest.

At Ally Bank, we offer some of the most competitive rates in the country and a variety of CDs to fit your financial goals. Learn more at Allybank.com or call live, 24/7 customer care at 877-247-ALLY (2559) today.

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