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Average rates on certain certificate of deposit (CD) terms have fallen this week.
One year CD this week
The typical APY, or annual percentage yield, on popular one-year CDs is 1.36%, down from 1.37% last week. A month ago, one-year CD yields averaged 1.25%.
CDs are savings accounts with fixed interest rates that are generally higher than those paid on other savings products. The catch is that you have to keep your money in the account for a certain period of time, called the CD term. The longer the duration, the better the performance.
CD 3 months, 6 months, 9 months this week
On CD terms of less than a year, rates are mixed this week.
APYs on three-month CDs are averaging 0.33%, down from 0.32% last week. A month ago, the typical three-month CD yield was 0.24%.
For six-month CDs, the typical APY this week is 0.90%, down from 0.91% last week. A month ago, rates for the six-month term averaged 0.81% APY.
The average yield on a nine-month CD this week is 0.90%, stable with last week’s average of 0.90%. A month ago, nine-month CDs had an average APY of 0.61%.
18 month CD this week
CDs that last a year and a half this week have an average APY of 1.99%.
That’s down from 2.02% a week ago. Last month around this time, the typical 18-month CD had an APY of 1.91%.
Rates on CDs are usually expressed in APY and not simple interest, because an APY more accurately expresses the annual yield of a CD. It takes into account compound interest, which is earned by both your deposit, or principal, and the interest you have already accrued.
5 year old CD this week
The average APY on a five-year CD – a favorite choice for investors looking for higher yield – fell to 1.86% from 1.88% last week. Rates are higher than a month ago, when five-year CDs were offered for an average APY of 1.84%.
You can face hefty penalties if you withdraw from a CD before it has “matured” or reached the end of its duration. Take your money out of a five-year CD too soon and you could easily lose a full year of interest.
CD of 2 years, 3 years and 4 years this week
For other multi-year CD terms, rates this week are lower.
APYs on two-year CDs are averaging 1.56%, down from 1.58% last week. A month ago, the typical two-year CD yield was 1.47%.
On three-year CDs, this week’s average is 1.68% APY, down from 1.70% last week. A month ago, rates for the three-year term averaged 1.62% APY.
And the average rate on a four-year CD this week is 1.76% APY, down from last week’s typical APY of 1.78%. A month ago, four-year CDs averaged 1.75%.
How do CDs work?
Once you’ve chosen a financial institution that offers a CD rate and term that aligns with your financial goals, you buy your CD. In other words, you make a lump sum deposit to open the account, and that money becomes your CD principal.
But before you make your purchase, make sure you understand the early withdrawal penalty for your CD. Penalties vary by CD length and can bite into your principal if you’re not careful.
As soon as you deposit your capital, the countdown begins for your timed investment. You will earn the fixed interest rate for the term of the CD. As with other deposit accounts, the bank or credit union will send you regular statements telling you how much interest your principal is earning.
Avoid penalties with a CD ladder
Longer-term CDs are attractive for their higher yields, but they require you not to touch your money for a longer period or incur penalties. Building a CD ladder is a way to reap the benefits of a longer term while having access to more of your money.
You stagger your investment by spreading your money across different CDs with varying terms. You put some in short-term CDs and you put some in longer-term CDs.
As the short-term CDs mature, you reinvest that money in new five-year CDs. Eventually, you’ll have five-year CDs maturing every year. Your investment will seem more liquid and you will get higher returns.
To find the best CD prices, you have to be prepared to shop around. Competition in the CD market is fierce between banks and credit unions, and they offer attractive returns to earn your business. Comparison shopping is essential before purchasing a bank CD or credit union stock certificate.