CD Advantages and Disadvantages | Capital One (2024)

FAQs

What are advantages and disadvantages of a CD? ›

CDs offer higher interest rates than traditional savings accounts, guaranteed returns and a safe place to keep your money. But it can be costly to withdraw funds early, and CDs have less long-term earning potential than certain other investments.

Limited access to your cash

Plus, you'll need to withdraw the entire balance from your account, forfeiting any potential interest you would have earned over the remainder of the term. There are some no-penalty CDs that don't charge this fee, but they're typically not available in longer term lengths.

Is it worth putting money into a CD? For some people, it can be worth putting money into a CD. If a person is seeking a riskless investment with a modest return, CDs are a good bet—you'll earn a higher rate than you would with a checking or savings account, but you'll have to commit your funds for a fixed period.

Are there any disadvantages to using CDs/DVDs for data storage? One major disadvantage is that they're susceptible to physical damage - scratches, fingerprints etc., which could cause issues when reading/writing data from/to them.

CDs tend to offer higher rates than standard savings account options. Another advantage is that CD rates are fixed where rates for checking or savings accounts can be lowered at any time. This means investing in a CD gives you a predictable return in a specific timeframe.

Disadvantages of investing in CDs

Once you decide on the term of the CD, whether it's six months or 18 months, it can't be changed after the account is funded. As noted previously, since CDs have a set interest rate and maturity date, you typically can't withdraw the money from the CD without paying a penalty.

For longer-term investors, CDs may present a different type of risk—that the interest they offer does not keep up with the rate of inflation. If that is the case, the purchasing power of one's money will fall over time.

You could lose money in a CD if you withdraw before you've earned enough interest to cover the penalty. Brokered CDs don't allow early withdrawals, but you could lose money if you sell them on a secondary market at a bad time.

Market Crashes and CDs

Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.

Which of the following is a disadvantage of putting your money in a CD? ›

One disadvantage of a certificate of deposit is that it has a higher interest rate than as savings account, but you must wait until the maturity date to get the money.

If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.

CD rates may not be high enough to keep pace with inflation when consumer prices rise. Investing money in the stock market could generate much higher returns than CDs. CDs offer less liquidity than savings accounts, money market accounts, or checking accounts.

You could get stuck with a lower interest rate than what becomes available. Savings account and CD interest rates can fluctuate. With a savings account, your money will automatically start earning a higher return if interest rates go up. With a CD, however, you'll be stuck with whatever rate you locked in initially.

Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

Disadvantages of a CD ladder

If you forget to move funds from one CD to another once it matures, the CD could roll over into the same term that just ended. Inflation: Although rates are high, they are still outpaced by inflation.

One of the main advantages of CDs over older music formats is their superior sound quality. CDs provide a clear and accurate reproduction of the original recording, without the hisses, pops, or other audio artifacts often associated with analog formats.

CD Investing Pros and Cons in 2024

CDs can be a smart financial move at times, but not so great at others. In the past, other investments earned higher rates than even the best CDs could earn. But, in today's high-interest-rate environment, CDs might be a great option.