Will I Lose Money When CD Rates Change?

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by: Nelson Stacey84
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Date: Sat, 5 Feb 2011 Time: 5:18 AM

When CD rates change, will certificates of deposits cause you to lose money? Are the best CD rates more dangerous?

Certificates of deposits are often considered to be one of the safest investments possible. They are just as safe as a savings account, while offering much better interest rates. The best CD rates are typically several times higher than the interest earned by a bank account. But CD rates can change, and this can be frightening to some people who aren't sure how certificates of deposits work.

Is Money Lost When CD Rates Change?

It depends on your definition of loss, and the type of CD that you invest in. As long as you invest money in a reputable bank that is insured by the FDIC (or a credit union insured by the NCUA), any money that you place into certificates of deposits will be protected as long as it is less than $250,000. This means that even if the bank goes out of business, you will not lose money. However, when CD rates change, it is possible for you to "lose" money that you otherwise might have earned in interest.

How Interest Can Be Lost With Fixed Interest Rates

Often, the best CD rates are offered by CDs with the longest maturity period. If money is withdrawn before this period, penalty charges are incurred. If the interest rate is fixed, this means that if the interest rates go up, the best CD rates can quickly become the worst. Alternatively, fixed interest rates can also protect you from losses when the CD rates go down.

How Interest Can Be Lost With Variable Interest Rates

of Certificates of deposits are also sold with variable interest rates. Some of these rates are based on treasury bonds, others on the stock market. Under these circumstances, you can get the best CD rates when interest rates improve. On the other hand, interest is lost when the interest rates go down.

Callable CDs

In some cases, certificates of deposits can be called by the bank. This means that if you purchase a fixed interest CD and the interest rates plummet, the bank can end the CD before the maturity period is reached. It is important to look for CDs that are not callable to avoid this problem.

About the Author

Tara Moore is the author of this article on CD Rates. Find more information on Certificates Of Deposits here.

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