How Does a CD Rate Get Determined?

What is a CD?

While the term "CD" may most commonly be used to refer to compact discs, it is also short for an important investing tool known as a certificate of deposit. Certificates of deposit, sold by banks and credit unions, offer a virtually risk-free method of growing money. The money that is deposited into a CD is deposited for a set amount of time and at a specific interest rate. The money is also insured by the federal government through the FDIC. The interest rate offered in a CD is usually much better than that offered by savings accounts, checking accounts or even money market accounts.

How Does a CD Interest Rate Get Determined?

The interest rate of any given CD is influenced by many different variables. To begin with, the current societal interest rate (prime interest rate) is the main consideration. The length of the CD is also very important. The longer that a customer agrees to leave her money in the CD, the better the interest rate she'll receive. Competition with other lending institutions is another key part of how banks and credit unions determine their CD interest rates.

How Can I Make Sure I Get a Good Interest Rate Investing in a CD?

The most important part of getting a good interest rate on your CD is shopping around at different institutions. Just as you would shop around if you were making a big purchase to find the best price, you need to shop around for your CD and find the best interest rate. It's also extremely important that you look at credit unions along with banks. Credit unions offer many of the same services as banks but are non-profit. This allows them, in most instances, to offer superior CD interest rates to their customers.

Resources

• How to Buy a Certificate of Deposit from eHow