Here's What Happens When You Get a CD From a Bank You Don't Recognize

With the Fed's fastest fund rate hike still under way, CD rates have skyrocketed to APYs we haven't seen in over a decade and a half. Many of the top-paying CDs are now over 5%, with some inching over 5.5% and beyond.

But when you look closely at the banks and financial institutions offering these high-paying CDs, you might have a brief moment of confusion. Many of the best CDs are not from national banks, like Bank of America, but smaller credit unions whose names you may not recognize. That might make you feel skeptical: After all, should you really lock money up with a financial institution you've never heard of?

While you should certainly be judicious, you don't have to choose CD issuers by brand name alone. In fact, it's pretty common for little-known banks and credit unions to offer CDs at higher rates than their larger counterparts for one big reason.

Top-paying CDs are cast to draw in depositors

Certificates of deposit (CDs) are products offered by banks, credit unions, and other financial institutions to draw in more depositors. Though it might seem odd to think of them this way, banks are businesses and earn revenue by lending money to borrowers at higher rates than they offer to depositors.

Big, well-known banks don't often have a problem attracting depositors, since their size exudes assumed security. But lesser-known banks don't have a national brand to precede them and have to use other means to grab depositor's attention. One of these tactics is offering the best CD rates.

Take, for example, Bank of America. Even in this high interest rate environment, Bank of America is offering rock-bottom rates on most of its CDs. Though some extremely short-term CDs offer notably higher rates, the bulk of its CDs, including six months and one year, will earn a whopping 0.03% on your savings. Not exactly something to get excited about.

In comparison, Quontic is offering a 4.50% APY on its 1-year CD with a minimum deposit of $500, while Bread Financial has a 1-year CD with a 5.25% APY. Both companies are offering high-paying CDs that are FDIC-insured up to $250,000 per depositor, per bank. That's enough security to get your deposit back, even if the bank falters. Some other high-paying CDs from financial institutions you may have never heard of include:

• Alliant: 1.5 year CD with 4.90% and $1,000 minimum deposit.
• Synchrony Bank: 6 month CD with 4.80% APY and $0 minimum deposit.
• Prime Alliance Bank: 6 month CD with 4.95% APY and $500 minimum deposit.

But can you trust a CD issuer you've never heard of?

The first thing you should look for in a financial institution is FDIC insurance. If a CD issuer is insured by the FDIC (or NCUA, in the case of credit unions), your CD deposit is safe up to $250,000, no matter what happens to the underlying institution. Even if the CD issuer isn't a bank per se -- some are tech companies -- it should be connected to a banking platform that is insured.

As long as the financial institution is insured, your deposit will be safe. Of course, you don't just want your deposit to be safe. You also want the bank or credit union to stick around long enough to pay you the interest guaranteed on your CD term. Fortunately, the signs of a weak bank aren't super hard to spot, as long as you know what to look for. For instance, if a bank is closing multiple branches, continually charging higher and higher fees, or losing depositors, it's likely having problems. You can also check rating services, like Bauer Financial, to see how third-party companies grade the bank, and the FDIC publishes its own list of "problem banks" every quarter.

All in all, many CD issuers you've never heard of are likely safe. Do your homework, but if you want to snag the best rates on CDs before they go back down, take a look at the full list of top-paying CDs and consider banks you've never worked with before.