Your Complete Certificate of Deposit (CD) Guide

Here's how to save and invest with CDs, or savings certificates.

Think of certificates of deposit as interest-bearing savings accounts — with a few key differences. A CD is sold by financial institutions like banks, brokerage houses and credit unions. CDs are considered a low-risk investment because they are generally FDIC-insured up to a high limit and because, when held to the end of the term, a CD will return the full amount of the original investment plus interest.

Because of the way they are structured, CDs can be ideal for someone who has extra cash that he won’t need for an extended period and wants to use to earn more interest than he would from a money market or savings account, without having to risk the principal investment.

CDs differ from traditional savings accounts because a CD requires that you deposit a certain amount — typically anywhere from about $50 to $100,000 — for a certain amount of time — anywhere from 30 days to five or more years. You’ll earn interest on your money, and the interest rate is usually fixed for the term of your CD. If you withdraw your money early, you will likely be charged a penalty.

Depending on which financial institution you bank with, your bank or credit union’s CD products might also be referred to as:

  • Term certificates
  • Term CDs
  • Savings certificates
  • Time deposits

A number of different types of CDs are available, as well as various strategies to maximize your earnings. So before you tie up your extra cash in a CD, learn all the options to find out which CD or CDs might be right for you.

Read: CD Rate Strategies for the New Interest Rates

Different Types of CDs at a Glance

Almost as many types of CDs exist as there are types of savers. Use this guide to help narrow your search and find the type of CD that will best suit your financial goals. Here are the types of CDs:

CD TypeKey FeaturesFactors to Consider
Traditional CD
  • Pays a set amount of interest for depositing money for a set amount of time
  • Lacks flexibility
  • Penalty usually assessed for early withdrawal
IRA CD
  • Earns interest
  • Money only becomes taxable once withdrawn
  • Penalty assessed for early withdrawal
Variable-Rate CD
  • Pays interest based on varying rate tied to agreed-upon index, such as the prime rate or Treasury bills, among others
  • Because rate will vary, you can end up earning more or less than you anticipated
Fixed-Rate CD
  • Pays set rate of interest for entire life of the term
  • Examples: callable CDs, liquid CDs, brokerage CDs and traditional CDs
Jumbo CD
  • Requires a large investment, usually a minimum of $100,000
  • Pays higher interest rates than CDs with lesser deposit amounts
  • FDIC still only insures up to $250,000
Brokerage CD
  • Offered by a stock broker, online brokerage or other investment professional who acts as deposit broker for the issuing bank
  • Might charge a flat fee or a percentage of investment amount
  • Some brokered CDs might be securities that are not FDIC-insured
Zero-Coupon CD
  • Purchased at a deep discount and pays no interest
  • At maturity, buyer receives full face value, sometimes with a large profit
  • No interest or profit is paid out until maturity
  • CD holder must pay tax on “phantom interest” accrued annually
Bump-Up CD
  • Allows you to “bump up” to the higher market interest rate if rates go up during the CD term
  • Generally, only one rate increase is allowed, if rates increase at all
  • Initial rate might be lower than that of a fixed-rate CD
Callable CD
  • Bank reserves the right to “call back” this type of CD at any time
  • Often has a higher rate than traditional CDs
  • If interest rates go down, bank can terminate the CD before its term is up, paying out the principal and interest due at that point
  • If rates go up, you do not have the option to cancel the CD before its termination date to invest at the higher rate
Liquid CD
  • Allows withdrawals at any time
  • Pays a lower interest rate than that of a non-liquid CD of the same term
Thrift CD
  • Offered by thrift institutions, such as credit unions and savings-and-loan institutions
  • You might need to be a member or hold another type of account with the institution
Uninsured CD
  • Not insured by the FDIC or by any other institution
  • Usually pays a higher interest rate than traditional CDs
  • If the CD issuer goes bankrupt, you could lose your investment
No-Penalty CD
  • No fee charged for early withdrawal
  • Usually pays a lower interest rate than traditional CDs
Index-Linked CD
  • Connected to a specified index, such as the S&P 500 or Dow Jones indexes
  • Return might be 100% of the index performance or another percentage, such as 90%
  • If the linked index declines, you run the risk of no profit
  • You will receive your principal back
Bear CD
  • Pays an interest rate inverse to the agreed-upon market index
  • If the linked index goes down, the CD earns interest
  • Speculative type of CD
  • Often used as a hedge against declining stock prices
Bull CD
  • Pays interest at a rate linked to a rising index, such as the Dow or S&P 500
  • If the market enters a bear phase and declines, you will still receive a minimum rate that must be paid
Add-On CD
  • Lets you add money to your CD before its maturity
  • Additional amount earns the same interest rate as the initial amount used to purchase the CD
  • Most add-on CDs only allow additional deposits of a specified minimum amount, such as $500

Term lengths, rates and minimum deposit requirements vary by institution and also depend on factors such as the federal funds rate.

Pros and Cons of CDs

CDs come with many advantages, but they also have drawbacks. And because you probably won’t be able to withdraw your money until the end of the CD’s term without paying a hefty penalty, it’s important to know all the facts. Here are some of the pros and cons to consider.

Advantages of CDs: Low Risk and High Interest Rates

CDs are insured by the FDIC up to $250,000, so you can invest knowing your money — up to that amount — is secure. Other advantages of CDs include:

  • Low risk: You can easily find CDs that are FDIC-insured up to $250,000. If you follow the terms of your CD, you can expect to get back the full amount of the original investment, plus interest if it’s an interest-bearing CD.
  • Higher interest rates: CDs typically offer better interest rates than most money market, checking and traditional savings accounts.
  • Fixed rates and terms: With a fixed-rate CD, you’ll know exactly how much your money will earn over a definite period of time.
  • Straightforward investment strategy: CDs can be easy to understand and easy to use.
  • Availability: CDs are offered at a variety of financial institutions.

Keep Reading: Things to Know About High-Yield CDs

Disadvantages of CDs: Low Liquidity and Lower Earning Potential

Despite the ease and security of investing in a CD, there are some negative factors to consider before you decide what to do with a lump sum of your money:

  • Low liquidity: Your money will be tied up, and you will likely not be able to withdraw your money early without paying a hefty penalty.
  • Lower interest rates: CDs offer lower interest rates than other, riskier investments.
  • Lower earning potential: Long-term CDs run the risk of earning less than the rate of inflation if inflation rises.

CD Interest Rates Made Easy

When you open a CD, you are entering into an agreement with the bank or financial institution issuing it. Typically, you promise not to withdraw your money for a certain amount of time; the bank agrees to pay you a specific, typically fixed, interest rate for that period. Here’s an example of how CD interest is calculated: If you buy a one-year, $10,000 CD with an interest rate of 2 percent annual percentage yield compounded annually, then at the end of one year, your CD would be worth $10,200.

Finding the best CD rates is a matter of searching the web and asking financial institutions about their CDs. Keep a couple things in mind: The longer the term and the more you invest, the higher the APY is likely to be. Also, your best bet for getting a higher APY is to search for online bank CD rates and credit union CD rates, as opposed to rates at national brick-and-mortar banks. Online banks and credit unions have lower overhead costs than national and brick-and-mortar banks; those savings are passed down to customers in the form of higher interest rates.

Because even the best CD interest rates won’t make you rich quickly, you might want to take advantage of ways to maximize your CD earnings. Strategies include CD laddering, promotional rates, variable-rate CDs, liquid CDs and bump-up CDs.

Answers to CD Interest Rate FAQs

Learn the answers to the most frequently asked questions about CD interest rates so you can decide whether this type of investment is right for you.

What Is a Bump-Up CD?

A bump-up CD or bump-rate CD is one in which you have the option to “bump up” to a newer, higher interest rate if rates rise during the term of your CD. A bump-up CD is usually limited to one increase, and your initial rate will likely be lower than that of a traditional CD of the same amount and duration.

Does My Principal Affect My CD Rate?

Yes. Generally, the higher your balance, the higher your interest rate.

How Do Yield Curves Affect CD Rates?

A yield curve is a graph that shows the yield of bonds of similar quality against their maturities. Usually, short-term interest rates are lower than longer-term rates. But that is not always the case. Sometimes, the yield curve steepens — the gap between rates on short-term and long-term bonds increases. The gap could mean that interest rates will rise, so you might want to limit your CD investments to short-term CDs, such as six-month CDs.

If the yield curve is downward-sloping, meaning rates could be expected to fall, you might choose to grab the presumed higher rate on longer CDs. But keep in mind that a yield curve is only a prediction, and the trend it indicates is not guaranteed.

Keep Reading: How Yield Curves Affect CD Rates

What’s the Difference Between the CD Interest Rate (APR) and the CD APY?

The APR is the interest rate that the bank is offering on the CD. The APY tells you how much you will actually earn as your money compounds.

For example, if you buy a 12-month, $1,000 CD with an interest rate of 1.2% APR and 1.21% APY, the CD would be worth $1,012.10 at the end of one year.

Read: What Is the Minimum Deposit for a CD?

CD Fees and Costs

CDs typically come with significant penalties for early withdrawal. Common penalty amounts are six months’ worth of interest on a five-year CD, with some banks charging 12 months’ worth of interest, for example. In some instances, the penalties can even dig into your principal, meaning you would lose some of the money you originally deposited for withdrawing early.

Other potential costs associated with CDs are fees. For example, brokered CDs, which are offered through a stock broker or other investment professional, sometimes require fees like a flat fee or a percentage of the amount you are investing. So before you lock your money in, make sure the interest rate is worth it.

Finding a CD That’s Right for You

When shopping for CDs, you’ll want to factor in more than just the interest rate. Before you open a CD, make sure it’s the right one for you by first answering a few important questions:

  • When will you need this money? Most CDs come with heavy penalties for early withdrawal, so don’t let a higher rate seduce you into tying up money you might need soon. If there’s a chance you’ll need the money, choose a shorter term or a CD without a penalty for early withdrawal.
  • Do you have an emergency fund? Make sure you aren’t using emergency funds for the CD. If you find yourself in a real emergency without dedicated emergency funds, you might end up resorting to using a credit card for your immediate expenses — and losing money by carrying a balance or having to take a cash advance.
  • Does the CD automatically roll over? If the answer is yes, make sure you take actions to remind yourself of the date your CD matures. If you forget, the bank will roll the CD over automatically, and you won’t be able to access your money for another term.
  • Do you think interest rates will rise or fall? The vast majority of CDs have a fixed interest rate for the life of the term. So, if you believe rates will rise in the future, perhaps you should accept a shorter term — and likely, a slightly lower interest rate — so you can renew to a higher rate later.
  • Can you accept loss on inflation? If you are investing in a long-term CD, remember that there’s always a chance that inflation outpaces your interest. At that point, you’re actually losing buying power. Decide whether you are comfortable with that risk before proceeding with a long-term CD.

How to Open a CD Account

A few requirements must be fulfilled to open a CD account. For example, for most CDs, you’ll need to be at least 18 years old or have a co-signer, and you’ll need to provide some form of ID. Here’s a breakdown of the typical steps involved in opening a CD account:

  1. Research banks, credit unions and other financial institutions to find the best interest rate.
  2. Once you’ve selected a CD, make sure you have access to the full amount of money you want to invest.
  3. Provide at least one type of proof of ID, such as a driver license.
  4. Provide proof of a verified checking account.
  5. Fill out and submit bank forms with your personal information.
  6. Transfer your investment amount — by check, cash deposit, or electronic or wire transfer — into the the CD account.

Once you’ve completed these steps, the bank will issue you CD documents with the amount, interest rate, APY, maturity date and other vital information. To avoid automatic renewal of the CD after it matures, set a reminder for the CD’s maturity date.

Related: Find Higher CD Interest Rates Now

CD Laddering

If you’re unsure about how long you want to tie up your money in CDs, or if you believe interest rates will climb in the near future, a CD laddering strategy might be right for you. CD laddering is a way to keep your investment somewhat liquid and can result in higher growth rates.

To create a CD ladder, simply divide up your total investment into smaller sums, buying CDs of varying terms. For example, instead of buying one CD worth $30,000, you might buy three $10,000 CDs — one each at six-, 12- and 18-month terms. By doing this, one-third of your money becomes liquid every six months.

When one CD matures, you can either use the cash for something else or reinvest it in another 18-month CD, keeping the ladder strategy going. In addition to added liquidity, this strategy also allows you to maximize interest rates because, upon the second round, you are always investing in longer-term CDs.

You can do this in any combination with any term lengths. If liquidity is of utmost importance, use shorter maturities, such as three-month terms. For less liquidity but higher rates, go for intervals of one year or higher.

Laddering-Related CD Strategies

You can use a few laddering-related CD strategies that help combine greater liquidity with greater interest rates. One of these strategies is a CD barbell: You put half your investment into short-term CDs and half into long-term CDs. With this strategy, you’ll have some flexibility with the short-term investments and get better interest yield with the longer-term accounts. Overall, you’ll get a medium yield average.

Another strategy is a CD bullet, in which you buy CDs that have the same maturity date at different times. So the first year, you buy a 10-year CD, the second year you buy a nine-year CD, and so on. With the CD bullet strategy, you minimize the risk of missing out on higher interest rates by staggering your purchase dates. A CD bullet strategy could be useful for maximizing savings for a specific goal with a predetermined payment date, such as college tuition or retirement.

Alternatives to CDs

CDs aren’t the only savings instrument available; many alternatives are offered that might better suit your particular needs and goals. Here are a few common alternatives to CDs:

Alternative Account TypeKey Differences From a CDWhen to Use It
High-yield savings account
  • Typically offers a lower interest rate than a CD
  • Interest rate is usually variable
  • Access money without penalty
  • If you need access to your money before a CD would mature
Money market account
  • Typically offers a lower interest rate than a CD
  • Interest rate is usually variable
  • Access money without penalty
  • If you need to access your funds soon
U.S. Series I savings bonds
  • Issued by the federal government
  • Terms range 1-30 years
  • Maximum allowable purchase of $10,000 in bonds per year
  • Combination of fixed and variable interest rates in one bond
  • If you’re saving for a long-term goal, such as college or retirement
U.S. Series EE savings bonds
  • Issued by the federal government
  • Term ranges from 1-30 years
  • Maximum allowable purchase of $10,000 in bonds per year
  • Fixed interest rate
  • If you’re saving for a long-term goal, such as college or retirement
Treasury bills
  • Sold at less than face value
  • Full value paid at a maturity date of 1 year or less
  • If you need your money within a year
Treasury notes
  • Government-issued investments
  • Specified interest rate paid every 6 months until maturity
  • Issued in 2-, 3-, 5 and 10-year terms
  • If you want to earn a good interest rate but need your money within a decade
Treasury bonds
  • Government-issued investment
  • Specified interest rate paid every 6 months until maturity
  • Issued in terms of more than 10 years
  • If you have long-term saving goals, such as retirement

Answers to General CD FAQs

Take a look at some answers to more general FAQs about CDs to help you decide how to proceed with this type of investment.

Should CD Beneficiaries Renew?

If you inherit a CD, the first thing to do is clarify your options with the bank where the CD is held. If you have the option to renew and you want to, check to make sure you’re getting the best possible rate. You might also consider other types of investments or close out the CD upon maturity.

What Is a CD Auto-Renewal?

When your CD is coming up for maturity, the bank will notify you. If you do not withdraw your money or inform the bank what to do with the money, the bank might reinvest your money into a new CD with similar terms. Auto-renewal deprives you of the option to shop for the highest current CD rates, the term length you’d prefer or the option to close the account.

How Do I Invest in Long-Term CDs Without Losing Liquidity?

One way to invest in long-term CDs without losing liquidity is to create a CD ladder. By using a CD ladder strategy, you divide the amount you invest in many CDs with different maturity dates so that you are always close to the maturity date of at least some of your money.

Read: What Should I Do With $50,000 Coming Out of a CD Account?