One of the features that makes a certificate of deposit (CD) so attractive is its high rate of interest compared to other savings accounts. However, a CD’s interest rate isn’t quite like those of other savings accounts. If you’re considering opening a certificate of deposit, there are some things about CD interest rates you should know to help you determine if a CD is the best place to put your savings.

Here’s what you should know about certificate of deposit interest rates

The Longer the CDs Term, the Higher the Interest Rate

This is a fact most people know, but if you’re never opened a CD before you should know that there’s no one set interest rate for CDs. Instead, the longer you keep your money in a certificate of deposit, the higher interest rate you’ll get.

What this means is that you’ll have to weigh how long you’re comfortable keeping your money in a CD against the interest rate you’d like to receive. However, it’s worth pointing out that as you get more comfortable opening a CD, you can open multiple CDs as part of a CD ladder strategy to take advantage of the interest rates long term CDs provide but use short term CDs to keep your money accessible.

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A CDs Interest Rate is Stable

The interest rates of other savings accounts may change, depending on whether the Fed raises or lowers interest rates. When you open a CD, though, you lock in that interest rate for the term of the CD. In other words, the interest rate you get when you open a CD will stay the same until the CD matures. This makes figuring out how much money you’ll  get back from a CD easy, and it can be very helpful if you’re saving for a financial goal.

Your Interest will Earn Interest

One of the best parts of storing your money in a CD is that when your initial deposit earns interest, the next month the interest your original money earned will earn interest of its own. This is known as compounding interest.

For instance, if you put $6,000 in a 48-month CD that pays 3% interest. The first month, you’ll get $15 in interest. During the second month, though, you’ll earn $15.03. Granted, three cents isn’t exactly a lot of money, but the next month you’ll earn a bit more and then a bit more until the CD matures. Eventually, your money will earn an additional $43.97 in compound interest in addition to the $720 of interest.

If you’d like to calculate for yourself how much compound interest you’ll earn on a CD, you can use the formula A = P(1 + r/n)^(n*t), where:

• A = Total amount at maturity
• P = Initial investment
• r = Interest rate
• n = Number of times interest compounds per year
• t = Number of years

Of course, you don’t have to do these calculations on your own. You can also use a compound interest calculator, like the one on First Alliance Credit Union’s website. Just enter a few key details about your CD, and the calculator will estimate how much you’re earning.

Got questions about CD interest rates? Ask us!

Take Advantage of CD Rates at First Alliance Credit Union

If you’re thinking about opening a CD, you need to know how their interest accounts work. For instance, you need to be aware that CDs with longer terms will have higher interest rates, and that the interest rate on a CD will be locked in until it matures. You should also know that thanks to compound interest, the money your CD earns will earn its own interest, getting you even more money.

If you’d like to open your own CD and take advantage of the interest rates, become a First Alliance Credit Union member today. One of our member advisors will help you open up a CD and answer any questions you might have. You'll also get a traditional savings account where you can set aside money to use for a certificate of deposit, as well as our online banking system and mobile app that will let you  keep track on how much interest your CD is earning.