What does the APY cd account rate mean?
APY stands for annual percentage yield from an account. When APY is used in reference to a cd account rate, it means the amount of interest you will earn in a year on the funds you deposit into your cd account. Be aware that APY is the rate you earn with compounding. In other words it is the amount you earn if you allow all the interest to remain on deposit in your cd account. Some cd accounts allow you to transfer the interest that you earn in your cd account to another account at regular intervals. If you take this option you will not earn the APY rate that is quoted.
What does the APR cd account rate mean?
APR is short for annual percentage rate. When the APR rate is used in reference to a cd account, it describes the amount that you will earn in the form of a percentage on your initial deposit. The APR cd account ratequote will not factor in the compounding effect that can occur if you leave the interest in the account to accrue.
Which is more important APY or APR on cd accounts?
The answer here is both. Many banks quote the APY cd account ratesimply because it is higher and looks slightly better to prospective investors. Be sure when you are comparing cd account rates between institutions, that you are comparing apples to apples. If you already know that you plan to allow the interest that you earn in your cd account to compound you can focus on the APY rate. If a particular bank you are investigating only quotes APR rates, call or e-mail and ask for an APY rate quote. Do you already know that you are looking for a cd account that offers the option of monthly interest transfers? In that case, focus in on the APR rate and if you do not find the quotes that you need ask for them. Remember with a cd account you are lending the bank money and they should be more than happy to give you the information you need to make an informed decision about cd account rates.
Cd account rates and fees
Now that you are a super savvy investor who knows the difference between APR and APY rates it is time to talk fees. Do not make the mistake of deciding where to open your cd account based solely on rate. The cd account rate is only part of the story. You also want to compare fees between accounts. When opening a cd account you are agreeing to leave your money on deposit for a certain amount of time, but we all know that sometimes things happen that require investors to change plans. Knowing what early withdrawal fees will apply in advance will help you to find the cd account rate that is right for you as well as helping you to make a wise choice in regards to the term that you agree to.
Cd account fixed rate
It may seem redundant to talk about fixed rate in a page about cd account rates, since that is what they are generally known for; however, there are important factors that need to be made absolutely clear before your invest in a cd account. Most cd account rates are what is known as a fixed rate. This means that when you open your cd account, the rate you agree to is locked in for the entire cd term. For example, if I open a cd account today that has a term of 5 years, and the rate I am given is 1%, then no matter what happens in the market I earn 1% on my invested funds. This can be a positive and a negative at the same time. If I have done my research, and found a high cd rate with low fees and the market goes down, then I am making more money on my investment than current market conditions would allow for. On the other hand, even if I lock in what is considered a great cd account rate today, and the market return goes up, then I am locked into a rate that is less than what is available in the current market. This is the trade off for the security of knowing what your return will be and the lack of risk in investing funds in a cd account.
High yield cd rates
Here is the tricky part of investing in high yield cd accounts. There is no magic number that all banks have agreed is considered high yield. What some banks consider a high yield cd account rate may actually be the lowest rate that another bank offers. Comparing cd rates and making sure you are comparing apples to apples is a must. You also need to know what type of investor you are. If you are just starting out and have limited funds, you are looking for a high cd rate without a large minimum requirement. As an investor with a larger amount to invest, you are going to be looking for a cd account that offers a high rate and a cd account that rewards you for a larger investment. Different cd account rates cater to different types of investors so figure out what type of investor you are so that you can find the best cd account rate for your particular needs.
Summary of cd account rate
The APY cd rate and APR cd rate are both important. Make sure you are comparing a similar cd account rate. Remember cd rates are not the only item to consider. Look at the cd fees as well as the cd account rates. With most cd accounts you are agreeing to a fixed cd rate so make sure it is truly a high yield rate connected to the best cd account for your particular needs.