5 CD do’s and don’ts

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As investments go, CDs are fairly easy to understand. In exchange for depositing your money for a set period of time, a bank will, in turn, pay you interest.

At the end of that time period, you can take your money and accrued interest and go on your merry way, or you can buy another CD with the same bank.

As straightforward as that sounds, there are many ways to make mistakes when it comes to buying CDs.

Don’t agree to roll over a CD without learning exactly what the CD will yield. There have been cases where savers were offered automatic re-investments of their CDs at “prevailing rates.” In today’s rate environment, you may be sorely disappointed.

The SEC also recommends that savers ask how often interest will be paid before signing up for a CD.

Don’t stretch for yield. Interest rates are exceedingly low, and savers have had to take on more risk than they would otherwise. But buying a long-term CD to get higher yields in the short-term can backfire when the Federal Reserve increases short-term interest rates.

Stretching a little for yield can be worthwhile. For instance, buying a two-year CD rather than a one-year but going too far out can be expensive in terms of opportunity cost if rates go up before the end of the term, or there may be a steep early withdrawal fee to get out of the CD before it matures.

Do make sure you understand the terms of the deal including the maturity, call features and the early withdrawal penalty.

Do pay attention to FDIC limits. The FDIC insures deposits up to $250,000 per registration per institution. Read this Bankrate story to find ways to get the most insurance coverage: FDIC insurance protects your money (except when…)

Do investigate third-party CD brokers. When buying a brokered CD or a CD through a third-party, make sure you know who you’re dealing with. It’s very easy for scammers to prey on savers simply by offering them tantalizingly high rates.

Brokered CDs can offer better yields, but savers must do their homework before handing over money to just anyone.

Here’s what the SEC has to say:

Thoroughly check out the background of the deposit broker –Deposit brokers do not have to go through any licensing or certification procedures, and no state or federal agency licenses, examines or approves them. Since anyone can claim to be a deposit broker, you should always check whether your deposit broker or the company he or she works for has a history of complaints or fraud. Many deposit brokers are affiliated with investment professionals. You can check out the disciplinary history of investment professionals quickly using the SEC’s and FINRA’s online databases. Your state securities regulator may have additional information on investment professionals. To research the background of a deposit broker who is not affiliated with an investment firm, start by contacting your state government’s consumer protection office. You should continue researching until you are comfortable that the deposit broker is reputable. If you have concerns about a deposit broker, you should consider purchasing a CD through another deposit broker or buying one directly from a bank.

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