Who Invented CDs?

Certificate of deposit (CD) accounts are a type of time deposit you can use to save for short- or long-term goals. While you might think of CDs as being a feature of modern banking, they've existed in different forms for centuries. The concept of issuing certificates of deposit originated in the 1600s with the European banking system.

Key Takeaways

  • A certificate of deposit is a time deposit account that allows savers to earn interest over a set time period.
  • The concept of issuing certificates of deposit dates back to European banking practices in the 1600s.
  • Banks began issuing certificates of deposit to savers in the U.S. in the 1800s.
  • Today, banks and credit unions offer CDs to savers as a way to set aside money for short- and long-term financial goals.

What Is a Certificate of Deposit?

A certificate of deposit or CD, also called a time or term deposit account, is a special type of savings vehicle. When you open a CD account, you deposit money with the agreement that you'll leave those funds in your account for a set time period. While the money is in your CD, it earns interest. Once the CD reaches the end of the specified time period or matures, you can withdraw your savings or roll it into a new CD.

Traditional banks, online banks and credit unions can offer CD accounts to savers. There are different types of CDs you might be able to choose from, including:

  • Standard CDs
  • Jumbo CDs
  • Step-Up CDs
  • Bump-Up CDs
  • Raise Your Rate CDs
  • Add-On CDs
  • No-Penalty CDs

The minimum deposit requirements for a CD can vary by the type of account and the bank. You might be able to open a standard CD with $500, for example, while a jumbo CD might require a $10,000 minimum deposit.

In terms of CD rates, those are typically determined by the CD term. CD terms may be as short as 28 or 30 days or extend anywhere from five to 10 years. As a general rule of thumb, the longer the CD term, the higher the rate.

CDs are protected by FDIC coverage when held at FDIC member banks. The National Credit Union Administration (NCUA) provides coverage for CDs held at NCUA member credit unions. The current coverage limits for both are $250,000 per depositor, per account ownership type, per financial institution.

Important

Withdrawing money from a CD before it reaches maturity can trigger an early withdrawal penalty, which may be equivalent to some or all of the interest earned.

Who Invented Certificates of Deposit?

The history of CDs stretches back to the 1600s, when banks in Europe began issuing certificates of deposit to customers. At that time, CDs were typically issued as engravings which would allow the holder to claim their deposits later, with interest earned. The idea behind CDs was the same then as it was now: to encourage savers to keep their money with a certain bank.

Certificates of deposit were introduced in the U.S. as the banking system began to take shape following the Revolutionary War. Banks began offering different types of accounts, including demand accounts, safe deposit boxes and CDs in response to growing demand among consumers for secure places to keep money.

Early CD products did not enjoy any type of banking protection. That changed with the advent of the Federal Deposit Insurance Corporation (FDIC) in 1933. The FDIC was established under the Roosevelt administration as a means of promoting stability and public confidence in the nation's banking system. Today, the FDIC insures deposit accounts, including CDs, at member institutions in the event that a bank fails.

Note

Certain types of CDs, including Yankee CDs and some brokered CDs, do not enjoy FDIC protection.

How to Open a Certificate of Deposit

If you'd like to use a CD to save, opening one is fairly simple and many banks and credit unions allow you to do so online. Before opening a CD, first consider your savings goals. Next, take time to compare CD options. Specifically, consider:

  • CD interest rates
  • Maturity terms
  • Minimum deposit requirements
  • CD fees

Choosing a longer term might help you to secure a higher interest rate, but you'll need to be fairly certain you won't need to withdraw that money before maturity. Also, consider how much money you'll need to open a CD and what you might pay in fees.

A CD account typically doesn't charge any monthly maintenance fees the way a savings account might. But you may pay an early withdrawal penalty if you take money from the CD before it reaches maturity.

Tip

Consider building a CD ladder featuring CDs of varying maturity terms and interest rates for more flexibility with your savings.

Can You Lose Money in a CD?

Bank-issued CDs and CDs from credit unions are some of the safest places to save money. These CDs can offer a guaranteed rate of return with low-risk. Other CDs, such as Yankee CDs or brokered CDs, may carry more risk and the possibility of losing money on your investment.

What Happens to a CD If the Bank Fails?

Bank failures are a rarity but when they happen, the FDIC can step in to protect consumers. If you have a CD at an FDIC member bank, your accounts are protected up to $250,000 per depositor, per account ownership type, per financial institution.

How Much Will a CD Earn in 5 Years?

The amount of interest a CD will earn in five years depends on the interest rate and annual percentage yield, as well as the amount of your initial deposit. Longer-term CDs tend to offer higher interest rates than shorter-term CDs. Using a CD calculator can help you estimate your potential interest earnings with a five-year CD.

Are CDs a Good Investment?

A CD could be a good investment if you're looking for a safe place to save money while earning interest. On the other hand, if you're hoping for higher returns you may be better off putting your money into other investment vehicles, such as stocks, mutual funds or exchange-traded funds (ETFs).

Bottom Line

CDs have a long history and we can thank the European banking system for inventing them hundreds of years ago to encourage people to save. A certificate of deposit may be right for your savings plan, though it's important to shop around to find the best CD rates. Also, consider how other savings options, such as money market accounts or high-yield savings accounts might help you to reach your goals.

Article Sources

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  1. American Bankers Association. "1800-1849: A History of America's Banks and The ABA."

  2. Consumer Financial Protection Bureau. "What Is a Certificate of Deposit (CD)?"

  3. National Credit Union Administration. "Share Insurance Fund Overview."

  4. Federal Deposit Insurance Corporation. "Deposit Insurance FAQs."

  5. Federal Reserve History. "The First Bank of the United States."

  6. Federal Deposit Insurance Corporation. "History of the FDIC."