Some tips for establishing a CD with any financial institution include thinking about financial goals and risk tolerance, reading the small print to understand all features, asking questions for clarification when necessary, understanding the interest rate and how it is paid, and confirming the maturation date and penalties for early withdrawal, according to the U.S. Securities and Exchange Commission. It is important to look at the big picture to select the best CD for a particular situation.
Although long-term CDs have higher interest rates than short-term CDs, sometimes it is better to invest in a short-term CD if interest rates are low overall, states Bankrate. Longer terms lock in interest rates. If the interest rate goes up, the investor needs to settle for remaining with a lower-than-market-rate interest return, trying to sell the CD and reinvest, or taking an early withdrawal penalty and reinvesting. All of these are less than ideal investment choices, so if interest rates are low, it is better to stick with shorter CDs.
Diversifying is another way to reduce the risk of being locked into a low interest rate, maintains Bankrate. Using a ladder strategy, investors divide their investment incomes between CDs of different lengths. When the first CD matures, it is reinvested in a longer-term CD. This allows investors to continually reinvest at new rates if necessary, without completely losing the benefits of longer terms.