What Is a Callable CD?

What Is a Callable CD?

Callable CDs are similar to traditional CDs in that your money is locked in the account for the duration of the specified term. Tapping your funds before the maturity date will usually trigger an early withdrawal penalty. With a callable CD, the term length—and your return—isn't guaranteed.

The issuer has the right to terminate the account early, which they might do if interest rates drop. If that happens, you'll get back your initial deposit and any interest you've earned up to that point—but you'll miss out on future returns. With a traditional CD, you can count on a guaranteed interest rate that will last until the account matures.

Maturity Date vs. Callable Date

Knowing the difference between a maturity date and a callable date on a CD is important if you're considering investing in a callable CD.

• Maturity date: This marks the end of the account term. If you invest in a six-month CD, the maturity date is six months from the date of purchase, whether it's a traditional CD or a callable CD.
• Callable date: This is when the issuer is allowed to "call back" the CD early. This isn't guaranteed to happen, and probably won't if interest rates are on the rise. Be sure to check the callable date before investing in a callable CD.

Pros and Cons of Callable CDs

Pros

• They may offer higher interest rates. The main draw of a callable CD is that interest rates may be higher than traditional CDs. That can help your money grow at a faster clip.
• Your money is safe. CDs that are purchased from banks are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000 per depositor, per insured bank. Credit unions offer similar protection. And CDs are not invested in the stock market, so they're shielded from market volatility.
• They can help diversify your investment portfolio. Diversification prevents you from keeping all your eggs in one basket. Holding a mix of investments across different asset classes can help spread out risk. Callable CDs may prove useful here.

Cons

• Your interest rate isn't guaranteed. Let's say you make a substantial deposit into a callable CD with a high annual percentage yield (APY). If the issuer terminates the account early, your money will stop earning interest. That sudden change could disrupt your investment strategy.
• You could miss out on future earnings. CD issuers typically call back CDs when interest rates are dropping. That means you may have trouble finding a comparable rate with a new CD or other low-risk investment.
• You're sacrificing liquidity. Like all CDs, your money will be locked into the account until it matures or is called back. If you run into a financial emergency and need your money sooner, you can expect an early withdrawal penalty.

Differences Between Callable CDs and Traditional CDs

Callable CDs and traditional CDs are structured in a similar way except callable CDs can end early at the issuer's request. With a traditional CD, you know what you're getting in that the interest rate and term length are both guaranteed.

Another key difference is that you might get a better interest rate with a callable CD. And if interest rates stay the same or go up, the financial institution that issued it likely won't call it back. If they do, you'll have to adapt and revisit your investment strategy.

How to Buy Callable CDs

Callable CDs are available through some banks and credit unions, but you're most likely to find them through brokerage firms. A brokered CD allows you to hold multiple CDs in a single brokerage account. You can also sell a brokered CD before it matures on the secondary market without penalty.

Frequently Asked Questions

• Are Callable CDs Safe?

  Virtually all bank-issued CDs are FDIC-insured, making them safe investments. The same goes for the CDs credit unions issue. There's still the risk that you lose money in the form of early withdrawal penalties, however. You might also lose out on future investment returns if the CD is called back early.

• Are All Brokered CDs Callable?

  No, most brokerages offer a mix of callable CDs, traditional CDs and other investments.

• Should You Invest in Callable CDs?

  Whether a callable CD is right for you depends on your financial situation and investment goals. If liquidity isn't an issue and you find a callable CD with an attractive interest rate, you might feel comfortable going forward. Just be aware that the term could end early. If that happens, how will you reinvest those funds?

The Bottom Line

Callable CDs could grow your money faster, but like any investment, they have their benefits and drawbacks. Weighing the pros and cons can help you decide if it makes sense for you. It's always smart to look at the big picture and consider how a callable CD fits into your overarching financial goals. If you choose to buy one, do your research to find the best rate and term—and always read the fine print and clarify the callable date.