Are Online Certificates of Deposit (CDs) Safe?

Certificates of deposit (CDs) are perfectly safe places to stash your cash whether they're purchased online or at a brick-and-mortar bank as long as you follow a few rules.

Make sure the money in your CD is federally insured against losses by either the Federal Deposit Insurance Corp. (FDIC) if it's a bank or by the National Credit Union Administration (NCUA) if it's a credit union. Almost all legitimate financial institutions are insured by one or the other.

Make sure you're dealing with a legitimate institution and not a scam. Granted, scams are more easily pulled off online than off.

Read the fine print. Most CDs do not have fees attached but there is a penalty for withdrawing your money early, and the amount of that penalty is up to the bank.

Understanding Certificates of Deposit (CDs)

Certificates of deposit are popular products for savers looking to put aside some money for the short term in return for a better rate of interest than an ordinary savings account usually gets.

If it is FDIC-insured, as almost all banks are, CDs are considered among the safest investments available because the investor can't lose the principal, as is all too possible in the stock market. And the principal is insured even in the event of a financial collapse by the institution that holds the money. CDs are federally insured against losses for up to $250,000 per depositor per institution and a joint CD account is insured for up to $500,000.

Moreover, the interest rate is fixed and guaranteed. It can't be reduced during the term of the CD if interest rates in the world at large decrease. (It won't be increased if interest rates rise, either.)

It's worth noting that the FDIC has been in operation since 1933 and no depositor has since lost a penny from a bank deposit.

Savings Deposits vs. CDs

Your money is equally safe in a savings account or a CD. Both types of deposits are federally insured against losses for up to $250,000 per depositor or $500,000 for a joint account.

A CD requires that you commit to leaving the money in the account for a set term, which can be anywhere from a few months to 10 years or more. They usually pay a little more in interest than a savings account. Generally, the longer the commitment, the higher the interest rate.

You can get your money out of a CD before it matures but there's a penalty for doing so. The amount of the penalty is up to the institution, but it can eat into the interest you earn if not eliminate it.

Where to Buy a CD

Like savings accounts, CDs are available at almost any bank, online or off. They're also available from credit unions and brokerages.

The CDs offered by online banks are just as safe as those offered by their giant corporate peers, as long as their deposits are federally insured. It is very rare for a financial institution, online or off, to not be FDIC insured. A few small banks are state-insured instead.

You can use the FDIC's BankFindSuite database if you want to make sure that a bank is FDIC insured. That said, it always pays to be wary of outright scams. 

CDs at Online Banks

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. The figure is $500,000 for joint accounts.

If you have more than $250,000 to invest, you can split it between institutions 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 Main Street banks.

The Online Banking Advantage

There is a benefit to investing in a CD online rather than in person.

It’s now possible to shop for CDs at more than 150 banks that accept customers nationwide. This creates a lot of competition to offer higher interest rates on CDs and greatly expands your choices beyond your own neighborhood.

The lack of significant infrastructure and overhead costs enables online-only 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. 

Avoiding CD Scams

CDs are subject to fraud, just like any other investment product. And it's easier to put up a fake website than it is to put up a fake brick-and-mortar bank. You should verify that they are who they say they are if you have any doubts about the legitimacy of a company you're,

The U.S. Securities and Exchange Commission (SEC) suggests several ways to do this:

• If a company’s website or promotional materials says their CDs are FDIC insured, check for the financial institution with the FDIC’s BankFind tool, or call 877-ASKFDIC (877-275-3342). The name of the financial institution should exactly match the FDIC listing.
• If the website or promotional materials say the CD is offered by a credit union, you can check this using the National Credit Union Administration’s (NCUA) Research a Credit Union tool or call NCUA’s Consumer Assistance Center at 800-755-1030.
• You can use FINRA’s BrokerCheck if a company’s website provides a name and the CRD number of a broker-dealer or an employee of a broker-dealer. This tool is used to verify whether the address provided in FINRA’s BrokerCheck matches the address provided by the company offering the CD.

Your money should be safe as long as the company offering CDs is registered in this way.

The Bottom Line

It’s important to verify that an online bank (or, for that matter, a brick-and-mortar bank) is legitimate and that its deposits are federally insured. Once you’ve done so, you can rest assured that your money is safe in an online bank CD.

Certificates of deposit are some of the safest investments available. They offer a guaranteed return on your money with no risk to your principal whether the CD is from a huge financial services institution or a small online provider.

Online banks should offer the same protections for your CD as brick-and-mortar banks and sometimes better interest rates.