Where to Put Your Cash: Call Deposit vs. Time Deposit Accounts

For most people, a bank account is simply a place to hold money, not make money. That's especially true these days, with interest rates remaining near historic lows. Yet, there are several types of bank accounts, so consumers should know which ones best fit their needs. 

A lot of people understand the two major types of bank accounts: savings accounts, which allow easy access and earn modest interest, and checking accounts, which are used for day-to-day cash needs and pay little or no interest.

Those are fine for starters, but there are other types of accounts that allow customers to earn higher interest in exchange for less access to their cash. These are called time deposit accounts and call deposit accounts, which are similar but have some key differences.

Time deposits, also known as certificates of deposit, pay a much higher interest rate but require a minimum deposit and tie your money up for a set period of time, which can range anywhere from six months to 30 years.

At least in the United States, the most popular time deposits have historically been for one, two or five years. Beyond that duration, your money has greater potential for growth via an investment account. Time deposit/CD rates fluctuate largely in step with the prime lending rate, which is itself a function of the federal funds rate set by the Federal Reserve.

Time deposits are known by different names in other countries. In Canada, for example, it's called a term deposit; in Ireland, it’s a fixed term account, and in the United Kingdom, it's a savings bond (which is different from the United States debt security of the same name).  

Call deposits are basically accounts that require you to keep a minimum balance in exchange for a higher interest rate. Unlike time deposits, you have ready access to most of your cash, yet are still able to earn a higher return.

Banks have been marketing these types of accounts for years, often calling them Checking Plus or Advantage Accounts. It's an attempt to offer the consumer the best of both worlds – easy access plus higher interest than they would get with a regular checking or savings account.

One advantage of call deposits is that they can be denominated in different currencies. For a South African wanting to minimize her rand holdings while capitalizing on the relative stability of the pound sterling or U.S. dollar, a call deposit is a way to do so without being subjected to giant transaction costs with every deposit or withdrawal.

Banks offer time and call deposit accounts simply to attract more depositors. Since banks make money by making loans, the more money they have on deposit, the more loans they can make. For banks, offering a slightly higher interest rate in return for a more stable cash flow makes sense.

Deciding which account is better is simply a matter of your objective. If you want ready access to your money, a call deposit is probably a better choice. But if you've got excess cash that you don't think you'll need for awhile, a time deposit may be the best choice.

The beauty of a time deposit is that they’re among the surest things in all of personal finance. Hidden costs are virtually nonexistent, happening only in the rarest of cases. (For instance, a lending institution will reserve the right to shorten the term at its discretion, not that they ever do.) See the deposit to term, as it were, and you’ll enjoy your money back with interest. Withdraw early, though, and you’ll be subject to penalties.

In practice, time deposits are used by investors (individuals, businesses, etc.) that are looking for safe storage. For that they sacrifice liquidity – or more accurately, liquidity beyond a certain level. Everyone needs some readily accessible cash. Once you’re past the point where having that cash is not a problem, only then should you examine time and call deposits.

Whether call deposits or time deposits suit you better, understand that a bank account is never a vehicle for making significant gains. It’s simply a safe place in which to gain a return a few points greater than what you’d receive from doing nothing with your money.