Most standard certificates of deposit (CDs) are among the lowest-risk investments and do not lose money. Like other banking deposits, the Federal Deposit Insurance Corp. (FDIC) insures most standard CDs should the bank fail.
But there may be other risks to consider. Some CDs aren’t FDIC-insured, so they are a greater risk. Also, there are opportunity costs if you lock up money in a CD and interest rates rise or inflation outpaces the CD’s interest rate.
Key Takeaways
- A certificate of deposit (CD) is a product that offers an interest rate payment in exchange for the customer agreeing to leave the lump-sum investment with a bank for a specific period of time.
- Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money.
- However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.
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How Standard CDs Work
A certificate of deposit (CD) is a financial product offered by banks and credit unions that offers a fixed interest rate payment for a specific period of time. CDs provide account holders with interest rates generally higher than average savings and checking accounts, so some consumers opt to open them.
CD accounts held by consumers of average means are relatively low risk and do not lose money because your combined CD, checking, savings, and money market deposits at a particular institution are insured by the FDIC for up to $250,000. (Certain retirement accounts are counted separately and can be insured up to another $250,000.) This means that if the bank fails, the FDIC helps to make sure you quickly get access to your insured CD funds.
The financial institution determines the minimum required to fund a CD, which could be $0 to $1,000 or more. CD account terms can range from seven days to 10 years. Banks allow you to renew or close a CD account upon its maturity.
You must pay a penalty fee (typically several months of interest) when you withdraw part or all of the CD’s funds before its maturity date. Taking an early withdrawal from a CD account can result in getting less money overall compared to leaving it in the account until the maturity date. However, such losses are not considered “losing money” because you are not losing the principal that you invested.
Brokered CDs carry more risk because licensing and certification are not required for deposit brokers.
Brokered and Other CDs
Investors with a higher risk tolerance can buy CDs from brokerage firms or salespeople other than banks or credit unions. Called brokered CDs, they are technically not FDIC-insured (though the broker’s underlying CD purchase from the bank is), so they can be risky.
Licensing and certification are not required for deposit brokers, so you should exercise due diligence and research anyone claiming to be a deposit broker before you choose to open a brokered CD.
There are several other forms of CDs with additional risks, including market risk, issuer credit risk, and secondary market risk. Consider the complicated index-linked or market-linked CDs. Depending on how the CD is structured, your principal investment in an index-linked CD could be FDIC-insured, but not the interest you earn, which is subject to market risk and other risks.
Other CDs may not be FDIC-insured, such as Yankee CDs. A Yankee CD is issued by a foreign bank domiciled in the United States for American investors and is not directly insured by the FDIC.
Inflation Risk
Inflation occurs when prices move upward overall within the broader economy. Inflation reduces your purchasing power—or how far your money goes. Inflation is a risk for CD investors receiving a fixed interest rate, particularly when locked in for an extended period of 24 or 48 months.Inflation may erode your total returns if the inflation rate exceeds your interest rate.
Inflation deflates the value of your CD’s money, not the amount itself. For example, imagine you put $1,000 into a two-year CD at 3% interest, compounded monthly. At the end of two years, you’ll have $1,061.76—$1,000 in principal and $61.76 in interest earnings.
However, suppose inflation is very high at 6%. Because you must spend more to buy less, your $1,061.76 is actually only worth about $944.96.
Interest Rate Risk
If interest rates are rising and you lock up your money in a traditional CD for a year or more as rates go higher, you may experience interest rate risk. This means that you’re earning less in interest than you would have if you had waited to put your money into a traditional CD or opted for a bump-up CD (which allows you to raise the rate) or no-penalty CD (which will enable you to break open the CD without penalty).
For example, imagine you put $1,000 into a 24-month, fixed-rate CD offering a 1% rate. If rates climb quickly to 4%, you receive significantly lower earnings than if you had waited for rates to go higher. Sometimes a high-yield savings account is a better choice if rates are predicted to rise, because the best high-yield savings rates are often nearly as high as the best CD rates, but you’re not locked into a rate.
You also could have earned more money by putting your funds in a riskier stock, an index, or another type of investment with a higher rate of return than your low interest rate.
FDIC and NCUA Risk
The FDIC and the National Credit Union Administration (NCUA) insure single accounts per person per institution up to $250,000. You could put the difference at risk if you have more than $250,000 altogether at one institution. For example, if you have $260,000 in CDs, a savings account, and a checking account at a bank, then the $10,000 you just put in a CD would not be insured by the FDIC if the bank failed.
How to Avoid Losing Money on a CD
Purchase your CD from a bank insured by the FDIC or a credit union insured by the NCUA, and ensure that you aren’t putting more than $250,000 in one CD or across your accounts in one institution.
Shop around for the best rate possible, and compare that rate to inflation. If you’re concerned about missing out on better rates in the future, consider a no-penalty CD or bump-up CD.
Ask about any risks the CD may have, particularly if you’re branching out into brokered, market-linked, or another, more complicated CD type. What’s the most money you could lose on the CD? Could you lose interest only or a portion or all of the principal, too?
Is it safe to buy a certificate of deposit (CD) through an individual broker or salesperson?
It can be, but there’s risk. Make sure to check up on the company or bank for whom they work, taking notice of complaints. Since individual brokers or salespeople are not officially licensed or approved, be aware.
Why should I open a CD account?
CDs allow investors to earn more interest than typical savings accounts, and they are fully insured up to Federal Deposit Insurance Corp. (FDIC) or National Credit Union Administration (NCUA) limits when obtained through an insured bank or credit union, respectively.
What is the best way to research CD rates?
You can search online for the best CD rates or best rates for a specific CD term to see what major banks and smaller financial institutions pay in terms of annual percentage yield (APY) on CD funds. You can also check online or in person with banks or credit unions where you maintain accounts. Major brokerage firms also feature brokered CD rates from partner financial institutions.
The Bottom Line
While it’s wise to wonder whether any investment can or will lose money, CDs represent a safe option for savings due to federal insurance of up to $250,000. In rare cases, you could lose money if you’ve:
- Placed more than $250,000 in a CD or account combination at an insured institution that fails
- Invested with an uninsured brokered CD account
- Invested in unique CD products where the return is indexed to stock market movements rather than paying a fixed return
Your total returns (principal plus interest) are more vulnerable to other kinds of risk—particularly if you’ve locked up money at a low interest rate in a rising-rate environment or if inflation’s higher rate is eating into your total returns. Consider these risks when comparing CD terms and rates.
