Disadvantages of CDs

CDs aren’t for everyone, and they might not fit your specific needs. Some of the reasons to steer clear include:

  • Early withdrawal fees: The main disadvantage is that your money is tied up for the life of the certificate. You pay a penalty if you need to withdraw your money before the term is up. However, there are several types of CDs that provide a certain amount of flexibility, so don’t forget to ask your bank about options.
  • Interest rates could rise: You run the risk that interest rates will go up on other products during your term. If it looks like interest rates are rising, you can get a no-penalty CD. It allows you to get your money back without charge any time after the first six days. They pay more than a money market but less than a regular CD.
  • APYs lag behind inflation: CDs don’t pay enough to keep up with the rate of inflation. If you invest only in CDs, you’ll lose your standard of living over time. The best way to keep ahead of inflation is with stock investing, but that is risky. You could lose your total investment. You could get a slightly higher return without risk with Treasury Inflation-Protected Securities or I-Bonds. Their disadvantage is that you’ll lose money if there is deflation.

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