Are CDs guaranteed?

By Sabrina Karl

When it comes to earning a return on your money, most options trade risk for return. The greater the risk you’re willing to accept, the more you can potentially earn.

Certificates of deposit are no exception, except in reverse: in exchange for a modest, capped return, your risk is almost nil.

CDs are virtually risk-free in two ways. First, they carry an explicit, unmovable interest rate. You know before depositing funds what rate the bank or credit union has agreed to pay you, and for what period of time you’re both committed.

The only exceptions are CDs with names like “raise your rate”. These special certificates allow you to improve your rate during the CD’s term, at your direction. But they don’t include any reciprocal option for the financial institution to do the rate changing.

But what if the bank with your CD goes under? Even here, you’re almost always protected. The vast majority of banks are FDIC-insured, as are most credit unions, with NCUA insurance. These two federal programs provide an important safety net to consumers, keeping them whole even in the case of a bank failure.

Deposit insurance covers up to $250,000 held by one individual at a single bank. So if you have more than that in deposit accounts, you’ll want to spread it out across multiple institutions.

A bank failure does present the only real risk of a CD, since you’ll likely be offered the choice of cashing out your CD, or continuing at an almost certainly lower rate. Your risk, therefore, is only the possible loss of earning the CD’s advertised rate for the full term.

An infinitesimal number of banks fail these days, so for savers wanting to invest some of their funds in stable, fixed-return vehicles, there is hardly a safer option than CDs.