Types of Accounts - Part II

Time deposits (certificates of deposit, CD) are special accounts where you agree to deposit your money for a certain amount of time and during that time the bank agrees to pay you a certain amount of interest rate, which is usually the highest rate the bank will offer for all of the various types of bank accounts they have. During this time period you are not allowed to withdraw the money at all. If you do, then the bank can penalize you by charging you a very high fee, which usually offsets any money you would have made by keeping it in the account until the end of its term. Sometimes the bank will only allow you to periodically withdraw the interest they pay on the account but not the amount you deposited into the account originally. Banks offer different lengths of time that you can choose for depositing your money. They can be for 1 month, 3 months, 6 months, 1 year, 2 years, 3 years, 5 years, etc. The longer the time period you choose, the higher will be the interest rate the bank pays. This type of account is really only good for those who have so much money that they know they will not need to use anytime soon and wish to earn the highest amount of interest on their deposits. The following table summarizes the 4 types of bank accounts.

Because the banking industry in the U.S. is so very competitive, it pays to check several different banks before opening an account to compare the various types of accounts, the limitations and penalties, the fees, and interest rates paid.

What type of accounts and services you choose to use at a bank depends upon your own unique requirements. Everyone should have at least a checking account. A checking account is needed for day-to-day living in America. If you have a small amount of extra money you don't intend to use for day-to-day living, then you can also open either a MMDA or a savings account. If you have a very large amount of money and don't anticipate needing to use it for a longer time period you might wish to also open a time deposit (certificates of deposit, CD) to earn a higher interest rate than a MMDA or savings account. When opening any bank account make sure you fully understand all the limitations, penalties, and fees that will be imposed on your account as these can quickly add up in cost if you use your account in means other than which it was intended.

Background
Types of Accounts - Part I
Types of Accounts - Part II