How Do 3-Month CDs Work? What to Know
Gain insight into 3-month Certificates of Deposit. Understand this short-term savings vehicle, how it functions, and practical considerations.
A Certificate of Deposit (CD) is a type of savings account that holds a fixed amount of money for a fixed period, earning interest. These financial products are generally considered low-risk. A 3-month CD represents a very short-term version of this financial instrument, designed for individuals who prefer to lock in funds for a brief duration. This structure allows for predictable returns over a defined period.
Understanding 3-Month CDs
A 3-month CD is a “time deposit” because funds are committed for three months. Your money remains with the financial institution for the entire term without access, in exchange for a predetermined interest rate. The interest rate on a 3-month CD is fixed at opening, ensuring that the return on your deposit remains constant throughout the entire three-month period, unlike accounts with variable rates that can fluctuate.
The short duration of a 3-month CD has specific implications for its interest rate; these CDs typically offer lower interest rates compared to longer-term CDs. However, this shorter commitment also reduces your exposure to potential interest rate fluctuations. These products are widely available from various financial institutions, including both traditional banks and credit unions across the United States. Deposits in these accounts are commonly protected by federal insurance agencies, such as the Federal Deposit Insurance Corporation (FDIC) for banks and the National Credit Union Administration (NCUA) for credit unions, generally covering up to $250,000 per depositor, per institution, per ownership category.
Interest Earning and Payout
Interest on a 3-month CD is typically calculated daily and compounded. While the interest accrues throughout the three-month term, it is most commonly paid out at the CD’s maturity date. On this date, both your initial principal deposit and all the accumulated interest become available to you.
Upon maturity, you have a few options for your funds. You can choose to withdraw the entire amount, including principal and interest, or you can opt for an automatic renewal, also known as a rollover, where the principal and sometimes the earned interest are reinvested into a new CD for another term. Most financial institutions provide a short grace period after maturity, typically 7 to 10 days, during which you can withdraw your funds or make changes without penalty.
Breaking the fixed-term agreement by withdrawing funds before the maturity date usually results in an early withdrawal penalty. A common penalty for a 3-month CD might involve the forfeiture of a portion of the earned interest, such as 30 to 90 days’ worth of simple interest on the amount withdrawn. In some cases, if insufficient interest has been earned, a portion of the principal may be forfeited to cover the penalty.
Opening a 3-Month CD
Opening a 3-month CD involves a straightforward process. Begin with selecting a financial institution that offers competitive rates and terms. Both banks and credit unions provide CD options, and you can compare their offerings. It is important to consider any minimum deposit requirements, which can vary significantly from one institution to another, ranging from as little as $500 to several thousand dollars.
The application process can be completed online, in person, or over the phone. During the application, you will need to provide identification details, including a government-issued identification and your Social Security Number.
You will also need to provide information for linking a funding source from which your initial CD deposit will be transferred. Once the application is complete and the funds are transferred, your 3-month CD account will be established, and the interest will begin to accrue according to the agreed-upon terms.