Everyone is looking for the best interest rates on CDs. Especially in this time of economic hardship, people are trying to find the best deals and the best options for their money. One thing that can be overlooked for interest on CDs is the effect of compounding.
To truly find the best CD interest, you need to find out how often it is compounded. Most certificate of deposits compound quarterly which means that every 3 months, the amount of interest you have earned gets added on to the CD. You will then be getting interest on the new higher total from that point on. The same thing happens the next quarter where the new interest will be calculated and then added on to the CD.
While this may not seem like a lot, over time, compounding interest can make a huge difference. If you match at CD that compounds yearly (interest is only added in at the end of the year) to one that has interest compounding daily (interest is calculated and added into the CD every day), there will be a significant difference at the end of one year.
As mentioned, most CDs that you find will have interest that compounds quarterly as that is sort of the standard CD. However, if you look hard enough you may be able to find ones that compound more often and that may make a rate that looks worse actually be better.
Banks and financial institutions are coming out will all sorts of new things to interest investors and get their business. You need to pay close attention and always read the fine print of all things you sign up for and all places where you invest your money. Before you sign up for a no risk CD or any other investment vehicle, you should be asking questions and reading the fine print to make sure you understand what you are getting into.
With interest rates on CDs especially, you need to make sure you don't put your money in one that compounds yearly unless you do the math to make sure it is comparable to others that compound more frequently.