Are Certificates Useless?

What’s the big deal about CD rates anyway? Every financial institution whether a bank, credit union, or something online throws Certificate rates out their like big shiny lures. But can a single rate on one product tell you anything about the FI?

The answer to the last question is obvious. But FIs aren’t just out to lure in new customers when they advertise CD rates. They’re looking for deposits. They use the CD rate bate because it works for them. It also works for the many people who nab the rate.

Here are the simple pros and cons of certificates:


CDs are safe because they are insured.
Depending on how long it is to maturity, CDs may pay more than money markets.


Your money is off-limits until the CD matures. If you must, you can redeem the CD early, but you’ll pay a penalty.

So when does or doesn’t make sense to get one?
A lot of people think that CDs only make sense if you’ve got all your other finances in order:

  • 6 months or more in emergency cash
  • low debt
  • maxed out retirement fund

So the same people say that Certificates don’t make sense if you are under 40 years old. Age restrictions are a rather narrow way to look at it, but I’d have to say that for most people the formula works. However, you need to understand the real value of this financial tool.

Certificates are good for parking away some cash for a specific reason such as a downpayment for a downpayment or other big purchase. In this case it would be locked away where you can’t touch it without some effort. Meanwhile it continues to grow.

It’s not a lock it or lose it scenario. Yes, there are penalities for early withdrawal but you won’t lose a large sum. Typically the penalty for early withdrawal is a month or two of interest.

Now say you’ve $5,000 and you don’t know what to do with it. The first thing you want to do is to pay down debt. If that’s taken care of then you’re best bet would be to add that cash to your IRA or other retirement fund. Like all tools certificates work best when used as intended.


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