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Types of Certificate of Deposit Accounts

Bank Sign on Branch FacadeAn average savings account may give you a measly 0.05% interest. In fact, some banks go as low as 0.01%. Of course, this is only something to get excited about if you save large amounts of money.

However, through a certificate of deposit, you can be able to earn better savings interest and keep your savings safe. A certificate of deposit is a type of business bank account in Bloomington, usually covered by the Federal Deposit Insurance Corporation.

It allows you to get higher rates than a money market or a savings account. The tradeoff is to leave your money with the bank for a period. There is typically a penalty attached to accessing the money before the period is up. Here are three types of certificate of deposit accounts:

1. Long- and short-term certificates of deposit

That period when you have no access to your money is referred to as a term. Terms are available in many ranges. A period of one month to a year counts as a short-term certificate of deposit. Long-term rates last longer than a year and have even higher interest rates.

2. Variable-rate certificates of deposit

Most certificates of deposit give an interest rate that is fixed over the agreed period. However, variable rated ones change the rates with market index changes. This is a risky feature since you could either lose or earn more if the index rises.

3. Step-up certificates of deposit

Instead of automatically changing rates, like with variable certificates of deposits, stepups give you a limited chance to reset the scale after an increase in market rates. However, most of these stepups begin at rates lower than fixed rates. A stepup might be helpful if it has substantial jumps in prices.

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The type of rates will impact how much interest the banks pay. As a rule of thumb, compare your options before you settle. Only be sure that you are comparing apples to apples. For example, compare similar certificates of deposit offerings from different banks.

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