Federal Deposit Insurance Corporation - Safe & Sound CDs
FDIC insured Certificates of Deposit are a safe and attractive investment. FDIC insured CDs are safe because they are insured by the US federal government for up to $100,000 for an individual account. They are attractive because they pay a stable interest rate that generally doesn't fluctuate during the term.
FDIC stands for the Federal Deposit Insurance Corporation and was established in 1933. It was started during the Great Depression to boost confidence in banks. Various attempts had been made prior to that, but from 1929 to 1933, 9000 banks ceased operations resulting in losses of $1.3 Billion. As a point of reference there are currently about 8,471 FDIC insured banks in the US and its territories (such as Puerto Rico and American Samoa).
Certificates of Deposit are considered a time-deposit. You agree to let the bank keep your funds for a period of time from 30-Days all the way up to 20-years. Most popular terms are from 1-year to 5-years. In exchange, the bank usually offers to pay you a higher rate of interest than you would receive in a plain savings or checking account. Usually, the longer the term of the certificate of deposit, the higher the rate. However, as recent as 2005 and 2006, many banks have been using the internet to attract additional deposits through high yielding savings accounts. Many of these high rate accounts, offer a teaser rate equal to a 1-year or 2-year CD, but shortly after, drop the rate to be more in-line with a 90-day CD.
For instance, during June 2008, AARP, through Huntington National Bank was offering a high yielding money market account at 4.50%. The bank took in millions of dollars in deposits. The rate stands at 3.50% That is a very significant decrease, especially for folks that deposited considerable amounts of money. On the other hand, FDIC Certificates of Deposit protect your rate for the duration of the term.
As I stated in the opening, the rate on the CD is usually the same for the term. However, there are a few types of CDs such as step-ups, bump-ups, and Callable CDs where the rate can change. A step-up CD has set periods of time where the rate moves up. The CD term might be 1-year, but every 3-months, the rate is adjusted. These can be good when the rates are somewhat static and it is anyone's guess when the rates may go up again or if a decline is likely. They usually have a slightly lower start-rate, but the average rate over the term is near or above the current rate for that term.
A bump-up CD is where the bank or credit union offers to allow you to change the rate one more more times during the term without the overall term changing. So the bank may offer a 5-year rate of 4.50% with a one-time bump. If during the term, the 5-year rates move higher, you can adjust your rate to the new level, but your maturity date stays the same. This can be good if you are dealing with a reputable bank, but I've seen far too many not adjust rates on the terms where they offered bump features. Before doing this type of CD, ask for some history of rate changes.
A callabe CD is generally a longer-term certificate of deposit. It may be from 7-years to 20-years. The bank offers an above market rate such as a 6.00%, but then the bank can close the CD after a period of call protection has been met. The call protection period is usually 6-months, but sometimes it can be 2-years or higher.
For more information on FDIC insured CDs please drop by Bank CD Rates or the Top CD Rates Blog.
Bank Man has been in the financial industry for over 10-years. He has seen rates come up and down during that time. He spends his time looking for high CD Rates so that you don't have to.
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