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The Certificates of Deposit Zoo

For the longest time I thought a certificate of deposit came in one flavor – vanilla. I deposit some money into a CD, I wait until it matures, and then I decide whether I want to put it back in or do something else. Online banks offer better rates than traditional and you can get fancy by creating a CD ladder, but at the core a CD was a CD was a CD. Then I learned about Ally Bank’s no-penalty CD that lets you close a CD before its maturity without losing interest. OK, that was interesting, but it wasn’t all that exciting.

Then today, I read this Bankrate article about the different types of CDs [3] and was surprised at all the options. I guess I had heard about several of them in the past but dismissed them as hokey (callable CDs? I’ve heard of callable bonds but never CDs). I think some of them are clever just to be clever (and so they can list more rates?) but overall it’s kind of a dry read… so I tried to make it a little more interesting.

How about we take a visit to the Certificate of Deposit Zoo?

Traditional CDs: The Elephant

Ahh, the majestic elephant. Elephants are the largest land animals and other species of elephant go as far back as the Mammoths prior to the Ice Age. Much like the elephants, traditional certificates of deposit have been around as far as anyone can remember.

Certificates of deposit are deposit accounts that are FDIC insured and offer a fixed interest rate for the maturity of the CD. If you want to withdraw the funds from your CD, you usually pay a penalty of several months, based on the maturity period; and the bank cannot close the account prior to maturity. All of the other CDs in this list are based on the same simple premise, with some additional features.

Bump-Up CDs: The Giraffe

Like the long neck of the giraffe, bump-up certificates of deposit let you “bump-up” your rate during the term of the CD. With traditional CDs, your interest rate is fixed for the life of the term. With bump-up CDs, you can increase the rate if the CD is being offered at a higher rate during the term. For example, if you invested in a CD at 2.00% APY and halfway through maturity you see the rate has increased to 2.25% APY, you have the option of increasing it to 2.25%. Choose carefully though, because you won’t be able to increase it until the CD matures.

Liquid CDs: The Rays

Fluid and free, like the manta ray, liquid certificates of deposit seemingly offer a flexibility not typically associated with CDs. With liquid CDs, you can withdraw your money from the CD without the typical penalty. Ally Bank [4] is one of the few banks I’m aware of that offers a no-penalty liquid CD, but as expected, the interest rate on a liquid CD is often lower than a similar term traditional CD because of the flexibility.

Zero Coupon CDs: The Old Oak Tree

Zero coupon CDs don’t pay out interest each month, they hold it all and pay out interest when the CD matures. If you’re wondering why anyone would want this, the answer is – “you’ll usually get a higher interest rate.” However, the biggest problem I have with it is that you must pay taxes on CD interest whether or not you have it deposited into your account. With zero coupon CDs, you still have to pay the interest even though you’ve earned absolutely nothing.

Callable CDs: The Hippos

Callable CDs work a little differently than your traditional CD in that the bank has the option of closing the account after a protection period. When you open a callable CD, you’ll get a stated interest rate, a term, and a call-protection period. So if you buy a seven year CD with a 12 month call-protection period, the bank can’t “call,” i.e. close the account, within the first year. If they do close it after 12 months, you get all your principal and interest back. The main appeal of this CD is in the higher rates you’ll get.

Brokerage CDs: The Penguins

Ahhh, those fancy pants and their tuxedos are here! Brokerage CDs aren’t fancy though, they’re just CDs being offered by brokers. They let you save through CDs at a variety of banks, not just the one’s you have accounts with, and so you might be able to get higher rates simply because you’re looking at a larger set of banks. What’s also interesting about brokerage CDs is that you can often trade them on a secondary market, which means the cost to recoup your deposit may be less because you avoid the interest rate penalty.

One huge warning: Your broker CD may or may not be FDIC insured, so double check that.

High Yield CDs: Bald Eagles

Bankrate really used this category to point out their CD listings so I’ll do the same and point you to the best CD rates [5] I’ve been able to find. In addition to the standard 12 and 18-month maturities, I’ve also published lists for the highest short-term CD rates [6] too. Between the two, you should be able to find rates that will destroy your local bank. Going with an online bank, with lower overhead, usually results in higher rates.

Hope you had fun at the zoo! 🙂

(Photos: missy_1074 [7], exfordy [8], saipal [9], jonhanson [10], tkksummers [11], law_keven [12], wili [13], sneakerdog [14])