What are callable CDs and are they worth it?
Key takeaways
Callable certificates of deposit often pay higher interest than standard CDs, but they allow the bank to redeem the CD early under specific conditions.
If a callable CD is called before maturity, you typically receive your principal and earned interest — but you may lose the opportunity to earn interest at that higher rate for the full term.
Callable CDs may suit investors who understand interest rate cycles and are comfortable balancing higher yields against reinvestment risk.
Callable certificates of deposit, or callable CDs, can be a valuable part of a financial portfolio offering market-leading rates. But what are callable CDs exactly and are they worth adding to your savings strategy?
In this guide, we’ll take a look at how callable CDs work and what risks they may have.
What is a callable CD?
Callable certificates of deposit have generally been used by high-net-worth individuals with financial advisors as a means of obtaining some of the top interest rates available on deposits.
In exchange for offering fixed premium rates for their entire term, the bank or credit union offering the CD has the option to “call,” or close, the CD prior to its maturity date.
At the start of the callable CD’s term, there is a non-callable period. During this time, the CD cannot be called and returns are essentially guaranteed. After the non-callable period ends, interest continues to accrue at the same fixed rate, however the institution that issued the CD has the right to close it before the maturity date.
What is a non-callable CD?
Otherwise known as a standard CD, fixed-term CD, or high-yield CD, a non-callable CD is an account offered by banks and credit unions through which you can deposit an amount of money for a fixed period of time during which those funds earn interest at a fixed rate.
What are the risks of callable CDs?
Callable CDs are generally considered to be a safe investment option. They offer a high level of stability, especially compared to riskier investments like stocks.
Callable CDs are less liquid than funds in other types of accounts, like high-yield savings accounts. That means that if you need to access money prior to the maturity date, you may incur an early withdrawal penalty.
For CDs called prior to maturity, while there is no loss of principal or accrued interest up to the call date, there is a loss of potential earnings that might have occurred had the CD been held to maturity. You may also encounter a reinvestment risk if interest rates have dropped.
Are callable CDs worth it?
Savers are typically drawn to the higher interest rates callable CDs offer compared to other deposit products. Because returns are essentially guaranteed during the callable CD’s non-callable period, the risks of the bank calling the CD early may be worth taking for those looking to earn a top interest rate.
What happens if your callable CD is called?
If you have a callable CD and the bank or credit union calls it, you would receive back your initial deposit plus an interest accrued up until the CD’s call date. The only loss in this case is any potential interest that would have been earned if the CD had reached maturity.
When are callable CDs called?
Callable CDs are typically called by banks or credit unions in situations where the interest rate environment has changed and they are now able to issue CDs at lower rates. In these cases, it may make more sense for them to pay a lower interest rate on a new CD than they were offering on the callable CD.
Should you invest in callable CDs?
Whether to invest in callable CDs or not ultimately depends on your own financial needs.
For savers looking to grow funds at a potentially premium interest rate, they can make a lot of sense. With returns all but guaranteed during the CD’s non-callable period, there can be a great upside to callable CDs.
However, those concerned with the interest rate environment may find high-yield CDs or no-penalty CDs as attractive alternatives, allowing for fixed rates for the CD’s entire term without the risk of them being called early.
For those looking to start saving with high-yield or no-penalty CDs, the Raisin savings platform can be the perfect starting point. From a single no-fee login, it’s easy to fund CDs across a growing network of banks and credit unions — all with just a minimum starting deposit of $1. Sign up in minutes and begin your savings journey today.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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