What’s a Certificate of Deposit? And What it Means at Self

what's a certificate of deposit

By Lauren Bringle, AFC®

If used right, a Certificate of Deposit (CD) could play an important role in your financial future. In this guide, we’ll take you in depth into what exactly a CD is, the difference between a CD and a regular savings account, how the CD at Self is a little different, and how you can use these unique tools to help build credit.

But first, let’s answer the burning question:

What’s a Certificate of Deposit?

A Certificate of Deposit (CD) is similar to a savings account, but you can’t access the money for a set period of time, otherwise known as the term. What’re the benefits to not being able to access your money right away? Turns out there could be a few. But let’s cover some of the basics first.

Another way to think of the term is how long the bank holds onto your money. Depending on the provider and option you choose, these terms typically vary from about one month to five years.

The maturity date is the date the the account reaches the end of the term and you can access the money in the account. Since these terms are for a fixed length of time, these types of accounts typically accrue higher interest than a standard savings account.

Many CDs also require an upfront deposit with a minimum of about $1,000, which can provide a barrier to entry for some people. They are typically insured through the bank that hosts them. Credit unions have their own versions of CDs, known as share certificates, which are insured through the National Credit Union Association (NCUA).

CD vs. traditional savings account – what’s the difference?

While CDs and regular savings accounts share some similarities, there are some key differences.

A savings account is a place where you can tuck money away to be held by the bank while it may earn interest. Within certain limitations, you can access your money any time. Savings accounts are an option for keeping money you don’t plan to use right away, such as money for an emergency fund.

Compared to CDs, savings deposit accounts usually have lower interest rates and fewer restrictions around how often you can deposit or withdraw funds. The Federal Reserve Board limits certain transfers and withdrawals from your savings account to six or less per month, so they don’t provide unlimited convenient access to money. But CDs are more limited – typically preventing withdrawals or deposits throughout the length of the term.

The interest rates add to the differences between a CD and a savings account. Because there are more restrictions on your ability to access the money being held in a CD, they typically pay higher interest rates.

If you can afford to put money away for a longer period of time, you could see how the CD interest rates might be more appealing than the rates for other types of accounts. But not all CDs work that way.

How’s a CD at Self different?

How a CD works in relation to the Self credit builder loan is very different than a traditional CD at other financial institutions. Unlike a traditional CD, the Self Credit Builder Account is a combination of loan and CD.

To open a traditional CD at a financial institution, you would need to have the money up front to use as a deposit. However, when you open a Credit Builder Account at Self, you do not need to make a deposit up front.

Instead, based on the loan terms you choose, the bank sets aside a certain amount of money as collateral for your credit builder loan at Self. This money is what gets held in a CD while you make monthly payments to pay off the loan. Once you’ve made all your payments, that’s when the CD unlocks and you get the CD funds (minus interest).

I like to compare the Self Credit Builder Account to the bumper lanes at a bowling alley – it helps keep you on track towards your ultimate goal – building credit.

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To continue with the “bumper lane” analogy, Self sets up these safeguards a few ways. For one thing, you don’t gain access to the money until after your term ends (just like a regular CD). However, since you have to make monthly payments on the loan, we also provide the option for you to set up AutoPay and send payment reminders to help keep you on track.

Just remember that ultimately, it's your responsibility to pay on time and in full.

Pay interest and get interest back

When it comes to CDs – any CD – it’s important to understand what’s known as the Annual Percentage Yield. APY is the amount of money (interest) you earn on an account over the course of a single year. In short, the higher the APY, the faster your money grows.

It’s important to note that APY is different than APR, which is the amount of interest you get charged. APR stands for Annual Percentage Rate. Understanding these two types of interest are important when it comes to understanding financial products in general, and understanding Self specifically.

The APY on a Self CD is 0.10%, which gets paid until your loan matures.

However, as part of the cost of doing business and helping you build credit (and a typical part of any installment loan) we do charge interest, which is reflected in your monthly payments. While the specific APR varies depending on the loan terms you choose, our APR could be up to (but does not exceed) 16%.

While to some that might sound high, when you compare it to the rates charged by other financial institutions, which can charge people with low or no credit scores closer to 36% or more, it no longer sounds that bad.

So if you’re trying to build credit to work towards future financial goals, a Credit Builder Account from Self could be (comparatively speaking at least) a lower cost alternative to save more money on interest over the long term.

Do CDs help you build credit?

The answer is – it depends. In their basic format, no.

However, you can leverage some CDs as security for a loan with the same bank. Since this type of loan is backed by collateral (your upfront deposit) it’s known as a secured loan. How does this work? Say you deposit $1,000 into a CD, for example. A lender could then loan you up to about 95% of your deposit amount, according to Investopedia.

From there, you would make monthly payments to pay back the loan, building payment history along the way. If you decide to go this route, just make sure the financial institution actually reports your payments to the credit bureaus. While many do, some don’t. So it never hurts to double check.

Another option is to sign up for Self, a credit builder loan available online and via our mobile app in all 50 states. Since you as a customer do not have to put a large upfront deposit down to open a Self account, it can be more accessible for people who don’t have the money to put down at the beginning. Instead, you make monthly payments based on a budget-friendly option of your choice until you’ve paid off the loan.

Once all your loan payments are completed and the CD comes to term, that’s when you get the money you put in back (minus the interest on the loan we talked about earlier). The benefit here is you build payment history, which counts for 35% of your FICO credit score. And Self reports your payment history to all three major credit bureaus.

Traditional CD, savings account or Self?

Bottom line? When it comes to deciding between a traditional CD, the type of CD provided by Self, or a savings account, there are essentially three options, depending on your personal financial goals. Here’s some information, based on different goals, that could help you choose the best option for you.

Goal 1: Saving money over the long-haul

If you’re looking for what’s basically a long term, high yield savings account you don’t need to access for a while, and you have the money for a deposit, then a traditional CD could be your best bet. Especially if you do not need to work on your credit.

Goal 2: Building credit responsibly

If your goal is simply to build credit, without some of the risks of overspending that could come with a credit card, then a Self Credit Builder Account could be just the ticket.

Goal 3: Saving money you can access relatively frequently

If your credit looks great and you simply want to save money, but might need to access it sooner rather than later, then a traditional savings account could be the right option for you.

Ultimately, it comes down to informing yourself about your options and making the right choice for you.

About the author

Lauren Bringle is an Accredited Financial Counselor® and Content Marketing Manager with Self Financial – a financial technology company with a mission to help people build credit and savings.

Written on May 1, 2019

Self is a venture-backed startup that helps people build credit and savings.
Comments? Questions? Send us a note at hello@self.inc.

Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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