What is a High Yield Certificate of Deposit?
High-yield certificates of deposit, or share certificate, is a type of deposit account that gives you a higher interest rate in exchange for keeping your money in the account for a certain amount of time. You might have to pay a penalty if you take out your deposit before the agreed-upon time. A high-yield certificate of deposit has one of the highest interest rates that credit unions offer.
Key point: A high-yield certificate of deposit has one of the highest interest rates that credit unions offer.
If you put your money into a high-yield savings account instead of a regular savings account, you may be able to earn more interest. The best share certificates come from credit unions that pay a higher APY or dividend rate than the national average. They also have good compounding schedules and reasonable minimum deposit requirements. Credit unions also place a high emphasis on excellent customer service and digital experiences.
How Does a High Yield Certificate of Deposit Work?
A high-yield certificate of deposit gives you a higher interest rate than the national average rate. Because the interest rate is higher, you can earn more on your deposits than you could with a savings account or a traditional share certificate. For example, suppose a high-yield certificate of deposit has an annual percentage yield (APY) of 3.0%. In that case, you could put $25,000 into a 12-month share certificate and earn $750.00 in interest. On the other hand, if you put the same amount of money into a share certificate or savings account with a 0.01% APY for 12 months, you would only earn $2.50 in interest.
Key point: For example, suppose a high-yield certificate of deposit has an annual percentage yield (APY) of 3.0%. In that case, you could put $25,000 into a 12-month share certificate and earn $750.00 in interest when the share certificate matures.
When you open a share certificate, you choose the “term,” which is how long you want to keep your money in the account. Share certificates have terms that range from three months to ten years.
Some credit unions set the rates on their high-yield certificates of deposit in tiers based on how long the term is. For example, a credit union might offer its lowest rate for the shortest time and its highest rate for the longest time. Generally, the longer you store your money, the higher your annual percentage yield (APY) will be. For example, a certificate of deposit with a term of four years would have a higher yield than one with twelve months.
After you open the account for your high-yield certificate of deposit, you won’t be able to add any more money to it. If you cash out your share certificate before it matures, you may have to pay an early withdrawal penalty fee. You can, however, put your money into another share certificate at the current market rate.
Why Is Putting Money Into A high yield certificate of deposit A Good Idea?
There are several different ways in which a share certificate could be a useful tool to help you achieve your financial goals. Here are some of the most important reasons why you should put your money in a high yield certificate of deposit:
Amounts That Were Purchased at a Higher Price
There is a chance that a share certificate will give a higher rate of interest than a savings account or money market. You must put money in the credit union for a certain amount of time to buy a share certificate. The annual percentage yield (APY) and the annual percentage rate (APR) that you earn depend on the credit union, how long you keep the share certificate, and how interest is paid.
Safety
A share certificate is one of the safest ways to hold money, along with savings and money market accounts. This is because the money in a share certificate is protected against loss. The National Credit Union Association (NCUA) will protect your money up to $250,000. If you buy a share certificate from a credit union, Also, your returns are guaranteed if you don’t take money out early.
Key point: The National Credit Union Association (NCUA) will protect your money up to $250,000.
Profits Are Guaranteed To Be Made
Since the interest rates on a share certificate are usually fixed for the whole term, it is easy to figure out how much money you will make from interest throughout the investment.
A share certificate calculator is a tool that lets you figure out how much your savings will grow based on the amount of money you put in and the annual percentage yield. There is a way to compare the interest rates of high-yield savings accounts and certificates of deposit side by side. If you are opening a share certificate when interest rates are still usually low, you might want to think about one that lets you bump up or step up your interest rate.
Laddering the Discs of a Share Certificate
Laddering your share certificates is a great way to save money and make the most of changing interest rates. Make a “share certificate ladder” by opening a lot of share certificates with different interest rates and lengths. When you save this way with share certificates, you’ll always have some that are about to expire. When interest rates go up, you can cash out your share certificate early or roll it over into a new one at a higher rate.
The Downside of Using Share Certificates
Share certificates can be used to save money for many things, but they aren’t always the best choice. Please think about the following problems with buying a high-yield certificate of deposit.
Accessibility
There is a limit to how often you can take money out of a savings or money market account. On the other hand, when you open an account for a share certificate, you have to leave your money there until the certificate matures. You might think twice about putting your emergency money in a share certificate. Some savings and money market accounts come with debit cards and ATM cards. These options are not available on a traditional share certificate.
Costs Associated with a Quick Cashout
You should invest the money in a share certificate if you don’t need it immediately. You can take money out of a share certificate before it is due to maturity, but you will almost always have to pay a fee for doing so.
If you cash in a share certificate before it’s due, the credit union that gave you the share certificate may charge you a fee. This punishment can come in the form of a flat fee or a percentage of the interest earned, both of which are fine. You might be unable to keep any interest you’ve earned on your share certificate. This would make it useless for what it was meant to do.
Uncertainty Regarding the Interest Rate
To get the most out of a share certificate to save money, you need to keep an eye on how interest rates change. When interest rates go up, it’s common for investors to get more money back from their share certificates. On the other hand, low interest rates make it hard for money kept in a share certificate to grow.
A share certificate puts investors at risk of interest rate changes because they can lock in savings at a low rate and then see rates increase. To take advantage of the higher rate, you will need to open a new share certificate unless you already have a step-up or bump-up share certificate.
High Yield Certificate of Deposit Substitutes
If the idea of term certificates and locking up your funds for a certain period of time do getting more interest on your savings doesn’t appeal to you, but you still want to make more money, you have other options.
Put Your Money In A High-Interest Savings Account
High-yield savings accounts pay more interest than regular savings accounts but less than high-yield certificates of deposit. You don’t have to pay any fees to get your money out of a savings account at any time. You can put more money into your savings account to increase the amount of interest you can earn.
A Money Market Account
Even though a money market account usually requires a larger opening deposit than a traditional savings or checking account, it gives you more access to your money and is easier to use. Since you are not locked into a certain interest rate, your potential earnings may change as market interest rates change.
When you keep your money in a high-yield certificate of deposit for a certain time, you get more interest. Most of the time, the interest rate on a high-yield share certificate with a longer term is higher. If you take out your share before the end of the term, you may have to pay a penalty. Alternatives make it easier to take money out, but they pay less interest on your savings.
