Thinking of opening a CD? You may want to reconsider.
If you have some money you don't expect to use for a while but aren't ready to invest, you may be wondering whether to put it into a savings account or a CD. CDs usually pay higher interest rates than savings accounts, so if you're going to keep your money tucked away in the bank, you might as well earn a little extra on it.
But CDs are far from perfect. Before you open one, consider these drawbacks.
1. You'll be penalized for cashing out early
When you put money into a savings account, you can access your cash at any time and remove as much money as you'd like. With a CD, you're effectively committing to keeping your money in place for the term of your CD, whether it's six months, a year, or longer. If you cash out your CD before that term expires, you'll be penalized for doing so.
The amount of that penalty varies from bank to bank. For a 1-year CD, you might lose two or three months' worth of interest for cashing out a CD before it matures. And to be clear, you generally can't take a withdrawal from a CD. If you have $5,000 in a CD but only need $500, you'll generally have to cash out your CD in its entirety to get that money.
2. You could get stuck with a lower interest rate than what becomes available
Savings account and CD interest rates can fluctuate. With a savings account, your money will automatically start earning a higher return if interest rates go up. With a CD, however, you'll be stuck with whatever rate you locked in initially.
So, say you put your money into a 1-year CD paying 1% interest. If, two weeks later, you see a 1-year CD offer for 1.2% interest, you're out of luck. Granted, you could close out your CD and open a new one with a higher interest rate, but then you'll run the risk of being penalized.
3. You may have to meet a minimum deposit requirement
While some savings accounts have a minimum deposit requirement, many allow you to open an account with any amount of money, or a small amount of money. But it's common for CDs to impose higher minimums -- especially those offering the most competitive interest rates.
Say you have $2,000 to put into the bank. You may come across a great CD offer, but with a minimum deposit requirement of $2,500. If that's the case, you'll have to pass on that opportunity.
What's more, because CDs impose that minimum, you might push yourself to part with more money than you're comfortable with. That could create a problem if a need for cash comes up later. For example, say you take $500 out of your emergency fund and put it into a CD to make a minimum deposit requirement. You could end up in a tough spot if an unplanned bill arises and you then need that $500.
Should you open a CD?
There are benefits to opening a CD, and when interest rates are strong, they can make a lot of sense. These days, however, CDs aren't paying very generously (neither are savings accounts, for that matter). In fact, the interest rate you get on a CD right now may only be marginally higher than what a savings account will pay you. And if that's the case, it's usually not worth dealing with the restrictions CD subject you to.
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FAQs
The biggest disadvantage of investing in CDs is that, unlike a traditional savings account, CDs aren't flexible. Once you decide on the term of the CD, whether it's six months or 18 months, it can't be changed after the account is funded.
What are the drawbacks of a CD? ›
The biggest disadvantage of investing in CDs is that, unlike a traditional savings account, CDs aren't flexible. Once you decide on the term of the CD, whether it's six months or 18 months, it can't be changed after the account is funded.
What is the negative impact of CDs? ›
CD rates may not be high enough to keep pace with inflation when consumer prices rise. Investing money in the stock market could generate much higher returns than CDs. CDs offer less liquidity than savings accounts, money market accounts, or checking accounts.
What is the drawback to CDs vs savings accounts? ›
Savings accounts will let you withdraw your cash at any time without penalty (although your bank may limit you to six withdrawals per month). CDs typically charge early withdrawal penalties for withdrawing money before the agreed-upon term is up.
What is the weakness of a CD? ›
7. Compact Disks
| Advantages of CDs | Disadvantages of CDs |
|---|
| Small and portable | Fairly fragile, easy to snap or scratch |
| Very cheap to produce | Smaller storage capacity than a hard drive or DVD |
| Most computers can read CDs. If there is no CD drive, a DVD drive can usually read them | Slower to access than the hard disk. |
1 more rowAre there any disadvantages to using CDs/DVDs for data storage? One major disadvantage is that they're susceptible to physical damage - scratches, fingerprints etc., which could cause issues when reading/writing data from/to them.
Why is CD losing value? ›
Like all fixed income securities, brokered CD prices are particularly susceptible to fluctuations in interest rates. If interest rates rise, the market price of outstanding brokered CDs will generally decline, creating a potential loss should you decide to sell them in the secondary market.
Does CD have any risk? ›
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.
Are CDs in danger? ›
Either way, CDs offer a fixed return, unlike variable-rate accounts or certain investments. You'll know exactly how much your funds have grown and when you can access them. CDs are a safe and stable option for investors seeking a modest return as long as you can wait until maturity to access your principal deposit.
Why are CDs a low risk investment? ›
Why are CDs considered low-risk? The return on a CD is tied to the interest rate you are offered. CDs usually feature fixed interest rates, which means overall volatility will not impact the performance of your savings. This is opposed to the price of a security, like a blue-chip stock.
You could get stuck with a lower interest rate than what becomes available. Savings account and CD interest rates can fluctuate. With a savings account, your money will automatically start earning a higher return if interest rates go up. With a CD, however, you'll be stuck with whatever rate you locked in initially.
Are CDs safe if a bank fails? ›
The FDIC Covers CDs in the Event of Bank Failure
But the recent regional banking turmoil may have you concerned about your investment in case of a bank failure. CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency.
What is the biggest disadvantage to savings accounts? ›
Low return – although consumers can earn interest, they offer relatively lower rates. Taxes – there are no tax benefits for putting money into a savings account. In fact, if a consumer accumulates a big enough balance, they will pay taxes on the interest they earn each year.
Are CDs safe if the market crashes? ›
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
What makes a CD not work? ›
A dirty or scratched disc surface is the most common reason for a CD/DVD issue when inserted into a computer. Check the disc for damage and confirm that the disc is compatible with your computer. Clean the disc and check for damage: Clean any dust or smudges from the disc with filtered water and a lint free cloth.
How much will a $500 CD make in 5 years? ›
This CD will earn $108.33 on $500 over five years, which means your deposit will grow by 21.7%.
Is it worth putting money in a CD right now? ›
If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.
Are CD safe if a bank fails? ›
The FDIC Covers CDs in the Event of Bank Failure
But the recent regional banking turmoil may have you concerned about your investment in case of a bank failure. CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency.
