Almost everyone starts their savings journey by putting money in a traditional savings account. After you've been saving for a while, though, you'll have enough money set aside to take advantage of other types of savings accounts. While some are pretty straightforward, like money market accounts, others, like certificates of deposit (CDs), can be a bit trickier

Even if you understand the basics of a CD, you might not understand why it's set up the way it is. Even more importantly, you might not get why someone might want to keep money in a CD as opposed to another type of account. Fortunately, CDs aren't hard to figure out, and once you know how they work, you might just want to open one yourself. 

How do certificates of deposit work?

Is a certificate of deposit an account?

Technically, a CD is a savings account. However, back when certificates of deposit were first created in Europe during the 1600s they weren’t considered to be an account. Instead, you made a deposit, and you got an engraved certificate that would let you claim the money you had deposited, along with the interest you’d earned.

These days, though, certificates of deposit are considered a type of savings account, and you won’t get a cool-looking certificate after you’ve created one. However, you can use a credit union or bank’s online banking platform or mobile app to keep track of your deposit, as well as the interest it earns.

Open a CD at First Alliance Credit Union

Why do CDs Have High Interest Rates?

The short answer is that the high interest rate is an incentive to open a CD and leave your money with a credit union or bank for a few months.

If you’re wondering why a credit union or bank would want you to deposit money and keep it in your account for a few months, though, you need to understand, on a basic level, how a financial institution works. A credit union or bank uses the deposited money and loans it out to other people. They do this so the credit union or bank will not only be able to give their members their money back, but also pay for their overhead expenses and employee salaries—in the case of larger banks, they also have to generate a profit for their shareholders.

The end result of this is that financial institutions always have streams of money coming in and going out, and when they know that some funds won’t be withdrawn for several months, like they are with a CD, they can confidently use that money to fund other people’s loans. The more deposits a credit union or bank gets, the more loans they can make.

Why do People put Money in CDs?

So you know why credit unions and banks like CDs, but what about their members? Why would someone let a credit union or bank keep their money in short term CDs for a few months, or even a few years in long term CDs?

The biggest reason is, of course, the interest rate. A CD gives you an exponentially higher interest rate than you’d get from a savings account, which makes it an ideal place to keep money you don’t plan on spending in the near future, such as:

• Money you’re saving for a financial goal
• Part of your emergency fund
• A windfall that you’re not sure how to use

In all of these cases, if you’re not going to spend the money, why not store it in an account where you’ll get more interest? As an added bonus, you’ll know how much you’re getting when the CD matures, and you won’t have to worry about losing money, like you would if you invested in mutual funds or individual stocks.

Got questions about CDs? Ask us!

Open a Certificate of Deposit at First Alliance Credit Union

Certificates of deposit might seem a little mysterious, but they’re actually easy to understand. European banks created them in the 1600s as an incentive for people to deposit money for a sustained length of time, and the biggest incentive was the high certificate of deposit interest rate. These days, bank and credit union members can use CDs to their advantage by storing money in these accounts that they don’t want to use immediately, like cash that they’re saving for a financial goal.

If you’d like to take advantage of what a CD has to offer, become a member of First Alliance Credit Union today and talk with a member advisor. They’ll be able to help you open a certificate of deposit account, and even suggest other ways to help you save, such as money market accounts and WINcentive savings accounts.