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What is a CD Ladder?

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A CD ladder is an investment strategy where you invest in multiple CDs with different maturity dates. The goal is to take advantage of the higher interest rates of a CD compared to those of a traditional savings account while still enjoying flexible access to your money and earnings.

A certificate of deposit (CD) is a savings account typically insured by the Federal Deposit Insurance Corporation (FDIC). The difference between a CD and a standard, or even a high-interest savings account, is that you agree to leave the money in the CD for a set term without withdrawing any of it. The term’s end is known as the maturity date.

With a CD ladder, you take a certain amount of money and spread it out over CDs of different term lengths. As each CD comes to maturity, you can take your money and reinvest it back into another CD that matures after your current ladder ends, adding another “rung.”

A CD ladder also protects you if federal interest rates drop because your rate is locked in for the terms of the CD. No matter what happens to interest rates, your CDs will remain wherever it was when you invested in it. Liquidity risk is also lowered if you ever need funds in the event of an emergency.

Maturity dates for CDs are usually set at three months, six months, 12 months or 60 months. However, other options exist that offer you 24-month terms, three-year plans or even four-year plans. The longer the term of the CD, the more interest you make on the principal invested. Withdrawing money from the CD early reduces the amount of interest you earn and may require you to accept a withdrawal penalty.

How Rates and CD Plans Work

Here is a table shows how CD plans work depending on the maturity date. On the left, you have different types of CDs, and on the right is how you’ll reinvest the money you earn from interest.

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The outcome of a CD ladder is that every year, you have three options:

  • Withdraw all of your money to allocate in some other manner
  • Withdraw some of the money – like the interest – and put the rest into another CD
  • Reinvest all of the money back into another CD, adding another rung

The Advantages of Using CD Ladders

If you value the safety of your money over adding more to it, a CD ladder is a promising option. In addition to the security, you’ll receive a steady flow of cash as the CDs are set to mature at different times.

It rivals investing in a traditional CD because, as each “rung” of the ladder comes due, you have the three options mentioned above. With a traditional CD, once your money is in place, you simply have to wait until the maturity date to explore any options, unless you accept a costly penalty.

As long as you don’t touch or withdraw the funds prior to their maturity date, your money will continue to grow and rake in interest according to your pre-set rates. Again, there is less risk with CDs than with traditional investments like stocks and real estate. It’s because your interest rates are locked in at the start, so your money will remain safe and unaffected should federal interest rates ever fall.

With each maturity date, you add more to your overall funds without sacrificing your initial investment. You can then get more money by taking the funds you’ve earned through interest upon your CD’s maturity date and reinvesting them into another CD, starting the process over. You’ll now have two CDs that are active and earning twice the interest.

How Your Credit Score Will Affect Your Access to CDs

Before they allow you to invest in a CD, a bank will check your credit scorewhen you apply.

They may do so by conducting a hard pull on your credit. This form of inquiry can drop your credit score by between five and ten points and can remain on your credit file for up to 2 years–something to keep in mind. Hard pulls occur when an institution needs more data than what is normally provided through a standard soft pull. It may include your payment history, past addresses and other intimate or sensitive data.

A soft pull, which constitutes a light checking of your credit and your overall credit score. It is not likely to affect you in the long run.

If you’re worried about your credit score, it’s worth shopping around a bit to consider all of your options. Some institutions will only require a soft check when you apply for a CD.

Are You Ready for the Next Steps?

Credit.com helps people just like you who are curious about investing and want the most money with as little stress as possible. So often, you’ve been taught that the only way to get more money is to work for it, but our website explains how your money can work for you.

If you’re not interested in CDs or just want to earn more money without understanding or figuring out a CD ladder, Credit.com offers high-interest savings accounts. You can just sit back and watch your money grow and accumulate over time.

One of the primary advantages of owning a high-interest savings account is that you’ll have consistent access to your money, and you won’t have to wait for a maturity date. You also won’t have to open multiple accounts, like you would with a CD ladder. While savings accounts aren’t always likely to offer interest rates equal to those of CDs, you will gain faster access to your funds. Make Credit.com your reliable source for important financial information.


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