Certificates of deposit (CDs) are popular products for savers looking to put aside some money for the short term and earn a modest return in the meantime. When you take out a CD, you agree to leave some money in an account for a set amount of time without withdrawing any of it. In exchange, your bank or credit union will pay you an interest rate return on the money that can be higher than that offered on savings accounts.
Nowadays, you can get a CD from hundreds of providers—not just community banks, but online banks as well. In general, the CDs offered by online banks are just as safe as those offered by their giant corporate peers, because all CD accounts are insured by the federal government. That said, it always pays to be wary of scams.
In this article, we’ll explain why online bank CD accounts are safe, but also explain how to spot a scam if you have doubts about the company you’re dealing with.
- Certificates of deposit are considered very low-risk investments. They offer a guaranteed return on your money and are insured by the federal government.
- CDs are insured and safe whether you bank with a huge financial institution or a small online bank.
- Online banks offer the same protections for your CD as traditional banks and sometimes better interest rates as well.
- It’s important to verify that an online bank is legitimate, but once you’ve done so you can rest assured that your money is safe in an online bank CD.
CDs at Online Banks
First, a quick note about the safety of CDs more generally. Certificates of deposit are regarded as among the safest investments available for two reasons.
First, the interest rate (that is, the return) you will get from a CD is typically fixed and guaranteed, so there is no risk that your CD’s return will be reduced or even fluctuate. What you signed up for is what you’ll get—it’s in your deposit agreement with the bank or credit union.
Second, all CD investments are protected by the federal government. The Federal Deposit Insurance Corp. (FDIC) provides insurance for banks and the National Credit Union Administration (NCUA) provides insurance for credit unions. When you open a CD with an FDIC- or NCUA-insured institution, up to $250,000 of your funds on deposit with that institution are protected by the U.S. government if that institution were to fail. If you have more than $250,000 to invest, you can split it between accounts to make sure it’s all protected.
These guarantees apply to online banks just as they do to “traditional,” brick-and-mortar banks. This means that CDs at online banks are just as safe as those held with regular banks.
And in fact, it may be advantageous to open a CD with an online bank instead of with a traditional bank. That’s because it’s now possible to shop for CDs at more than 150 banks that accept customers nationwide, and this creates a lot of competition for online bank to offer higher interest rates on CDs. The lack of significant infrastructure and overhead costs allow online banks to pay higher interest rates or annual percentage yields (APY) on CDs and other types of savings. The most generous of them offer as much as 1% to 2% more than you'll earn on accounts at a traditional bank—a gap that can really add up with a high balance.
Online banking is now normal. Approximately 56% of account holders do at least some of their banking on the internet.
Avoiding CD Scams
All CDs offered by legitimate online banks are safe, because your money is federally insured. But CDs are subject to fraud, just like any other investment product. If you have any doubts about the legitimacy of a company you are dealing with you, you should verify that they are who they say they are.
The SEC suggests several ways to do this:
- If a company’s website (or promotional materials) states their CDs are FDIC insured, you can check the financial institution with the FDIC’s BankFind tool or call 877-ASKFDIC (877-275-3342). The name of the financial institution providing the CDs has to match exactly to a firm verified by the FDIC, or it could be a red flag.
- If the website (or promotional materials) says the CDs are offered by a credit union, you can check this using the National Credit Union Administration’s (NCUA) “Research a Credit Union” tool or calling NCUA’s Consumer Assistance Center at 800-755-1030.
- If a company’s website provides a name and a CRD number of a broker-dealer or an employee of a broker-dealer, then use FINRA’s BrokerCheck. This tool is used to verify whether the address provided in FINRA’s BrokerCheck matches the address provided by the company offering the CD.
As long as the company offering CDs is registered in this way, your money should be safe.
Are CDs Safe?
Yes. When you take out a CD, your bank or credit union guarantees to pay you a set return on your money, and your money is federally insured. There is very little chance that you will lose money if you put it in a CD, even if the bank you’ve chosen fails.
Are Online Banks Safe?
Yes. Though it’s always important to be alert to potential scams, there are many trustworthy, safe online banks. Fifty-six percent of account holders do at least some of their banking on the internet, and online banks can often offer better returns on your money than their Main Street competitors.
Why Choose an Online Bank CD?
Online banks have fewer overheads than their brick-and-mortar competitors, and so can offer higher CD rates. And since the top nationally available CD rates are typically three to five times higher than the industry average for every term, shopping around can really pay off.
The Bottom Line
Certificates of deposit are some of the safest investments available. They offer a guaranteed return on your money and are insured by the federal government whether you have a CD with a huge financial services institution or a small online provider.
Online banks offer the same protections for your CD as brick-and-mortar banks, and sometimes better interest rates. If you suspect a scam, it’s important to verify that an online bank is legitimate, but once you’ve done so you can rest assured that your money is safe in an online bank CD.