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Certificates of Deposit: Tips for Savers
Investors searching for relatively low-risk investments often turn to certificates of deposit (CDs). A CD is a special type of deposit account with a bank or thrift institution that typically offers a higher rate of interest than a regular savings account. Unlike other investments, CDs feature federal deposit insurance up to $250,000. Here’s how CDs work: When you purchase a CD, you invest a fixed sum of money for a fixed period of time – six months, one year, five years, or more – and, in exchange, the issuing bank pays you interest, typically at regular intervals. When you cash in or redeem your CD at maturity, you receive the money you originally invested plus any accrued interest. But if you redeem your CD before it matures, you may have to pay an "early withdrawal" penalty or forfeit a portion of the interest you earned. Although most investors have traditionally purchased CDs through local banks, many brokerage firms now offer CDs. These brokerage firms – both traditional stock brokerage firms and those firms specializing in the sale of CDs, known as "deposit brokers" – can sometimes negotiate a higher rate of interest for a CD by promising to bring a certain amount of deposits to the FDIC-insured institution issuing the CDs. The deposit broker can then offer these "brokered CDs" to their customers. At one time, most CDs paid a fixed interest rate until they reached maturity. But, like many other products in today’s markets, CDs have become more complicated. Investors may now choose among variable rate CDs, long-term CDs, and CDs with special redemption features in the event the owner dies. Some long-term, high-yield CDs have "call" features, meaning that the issuing bank may choose to terminate – or call – the CD after only one year or some other fixed period of time. Only the issuing bank may call a CD, not the investor. For example, a bank might decide to call its high-yield CDs if interest rates fall. But if you’ve invested in a long-term CD and interest rates subsequently rise, you’ll be locked in at the lower rate. Before you consider purchasing a CD from your bank or brokerage firm, make sure you fully understand all of its terms. Carefully read the disclosure statements, including any fine print. And don’t be dazzled by high yields. Ask questions – and demand answers – before you invest. These tips can help you assess what features make sense for you: Beware of an Advertised CD Rate Far Above the Competition – First, it could be a product issued by a company that is not federally insured and second, it could be a marketing ploy. In either case any money invested could be at risk. A company may advertise in the local newspaper a 5.0 percent interest rate for a six-month bank CD for consumers to invest. When a customer calls, he or she is told to come to the office to discuss the details. It turns out that the bank is paying only 5 percent on the first $1,000 — not 5.0 percent on any balance. Another situation to beware of occurs when the customer is informed that the bank will pay only 2.5 percent but the sales person for the company offers to add enough money to the CD purchase to make up the interest rate difference. When the CD matures, there is no similar offer on a new CD and the individual can be steered into purchasing a non-insured investment that may be a poor choice for the consumer but very lucrative for the sellers. Be Careful When “Laddering” Your CD Purchases Over Different Time Periods – Say you have $100,000 to invest and you would like to maximize your earnings but you are hesitant about investing long term. Instead of putting it all into a five-year CD just to get a high, long-term interest rate, you could place $20,000 in a CD that matures in a year, $20,000 in a CD that matures in two years, and so on, which means you will have a CD maturing every year for five years. If you follow the strategy, you will roll each maturing CD into a new 5-year CD. The concern comes if you need to access most of your deposit where you will have to pay an early withdrawal penalty. Find Out When the CD Matures – As simple as this sounds, many investors fail to confirm the maturity dates for their CDs and are later shocked to learn that they have tied up their money for five, ten, or even twenty years. Before you purchase a CD, ask to see the maturity date in writing. Also, find out if the CD will automatically renew at maturity if you do not withdraw the money. If that is the case, find out if the automatic renewal will be at the "old" interest rate or the current rate at the time of the renewal. If market rates have increased, it is not to your benefit to renew at the old rate. For Brokered CDs, Identify the Issuer – Because federal deposit insurance is limited to a total aggregate amount of $250,000 for each depositor in each bank or thrift institution, it is very important that you know which bank or thrift issued your CD. In other words, find out where the deposit broker plans to deposit your money. Not all companies with bank-sounding names are actually banks or are insured by the FDIC. That is why you should verify that the institution is FDIC-insured. You can use our Bank Find service at www2.fdic.gov/idasp/main_bankfind.asp or by calling the FDIC toll-free at 1(877) 275-3342; for the hearing impaired call 1(800) 925-4618 (8 a.m. to 8 p.m. Eastern Time, Monday through Friday). You will also want to know if the agent plans to put your money into a bank where you already have deposits. If the institution fails, the FDIC will determine your insurance coverage by adding together the accounts opened by the agent and the account you opened directly with the bank. And if the combination of the agent-placed deposits and your existing accounts could push your total deposits over the current $250,000 federal insurance limit per bank, you should know that in advance, so you can take action to avoid having uninsured funds at that bank. In addition, be sure to ask what record-keeping procedures the deposit broker has in place to assure your CD will have federal deposit insurance. You should also ask your agent whether the FDIC’s requirements for the titling of deposit accounts placed by agents will be met. For example, if the account is titled in the name of the agent, and not in your name, you want the account records to indicate that the money is held by the agent on behalf of others, and that the records maintained by the bank or the agent identify the actual owner or owners of the funds. That way, each depositor can qualify for up to $250,000 of FDIC coverage. You should consider taking your business elsewhere if the agent can not or will not identify the bank, or if the name of the bank in the materials provided by the agent does not match what you are being told otherwise. That is because there have been cases reported of unscrupulous brokers allegedly misleading or defrauding investors with CD offers. For more information about federal deposit insurance, read the FDIC's publication Your Insured Deposits or call the FDIC's Central Call Center at 1(877) 275-3342 or (877) ASK-FDIC. For the hearing impaired call 1(800) 925-4618 or 1(703) 562-2289 (8:00 a.m. to 8:00 p.m. Eastern Time). Investigate Any Call Features – Callable CDs give the issuing bank the right to terminate the CD after a set period of time, but they do not give you that same right. If the bank calls or redeems your CD, you should receive the full amount of your original deposit plus any unpaid accrued interest. Understand the Difference Between Call Features and Maturity – Don’t assume that a "federally insured one-year non-callable" CD matures in one year. If you have any doubt, ask the sales representative at your bank or brokerage firm to explain the CD’s call features and to confirm when it matures. Confirm the Interest Rate You’ll Receive and How You’ll Be Paid – You should receive a disclosure document that tells you the interest rate on your CD and whether the rate is fixed or variable. Be sure to ask how often the bank pays interest – for example, monthly or semi-annually. And confirm how you’ll be paid – for example, by check or by an electronic transfer of funds. Ask Whether the Interest Rate Ever Changes – If you’re considering investing in a variable-rate CD, make sure you understand when and how the rate can change. Some variable-rate CDs feature a "multi-step" or "bonus rate" structure in which interest rates increase or decrease over time according to a pre-set schedule. Other variable-rate CDs pay interest rates that track the performance of a specified market index, such as the S &P 500 or the Dow Jones Industrial Average. Research Any Penalties for Early Withdrawal – Be sure to find out how much you’ll have to pay if you cash in your CD before maturity. Ask Whether Your Broker Can Sell Your CD – Some brokered CDs are issued in the name of the "custodian" or deposit brokers. In some cases, the deposit broker may advertise that the CD does not have a prepayment penalty for early withdrawal. In those cases, the deposit broker will instead try to resell the CD for you if you want to redeem it before maturity. If interest rates have fallen since you purchased your CD and demand is high, you may be able to sell the CD for a profit. But if interest rates have risen, there may be less demand for your lower-yielding CD. That means you may have to sell the CD at a discount and lose some of your original deposit. Find Out About Any Additional Features – For example, some CDs offer a death benefit that allows a CD owner’s heirs to redeem the CD without penalty when the owner dies. The bottom-line question you should always ask yourself is: Does this investment make sense for me? A high-yield, long-term CD with a maturity date of 15 to 20 years may make sense for many younger investors who want to diversify their financial holdings. But it might not make sense for elderly investors. ________________________________________ If you have a complaint about a CD you purchased through a bank, try to resolve your complaint directly with an officer of the bank before involving an outside agency. Financial institutions value their customers and most will be helpful. If you are unable to resolve the matter with the financial institution, use the following guidelines to determine where to direct your complaint. If your complaint is against a salesperson who represents a third-party investment firm, contact: Financial Industry Regulatory Authority (FINRA) If your complaint or inquiry is about a specific financial product or investment, contact: Securities and Exchange Commission (SEC) ________________________________________ If your complaint is about a financial institution or an employee of the financial institution, contact one of the federal agencies listed below. If the financial institution is either a state-chartered bank and not a member of the Federal Reserve System, or a state-chartered savings association, contact: Federal Deposit Insurance Corporation Comptroller of the Currency If the financial institution is a state-chartered member of the Federal Reserve System, contact: Federal Reserve Consumer Help ________________________________________ Questions? Call Visit Or for Customer Assistance
The
above information is intended to be presented in a nontechnical way
and is not intended to be a legal interpretation of FDIC regulations
and policies |
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Last Updated 07/20/2010 | Online Customer Assistance Form |