A certificate of deposit, or CD, is a savings account that earns a fixed interest rate for a set period of time called a term. In exchange for leaving your money untouched for the full term, you earn a higher interest rate than a standard savings or money market account. When the term ends — known as the maturity date — you can withdraw your money penalty-free.
How Does a CD Work?
Opening a CD is straightforward. Here’s what the process looks like:
- Choose your term length and the type of CD you want
- Meet the deposit requirements — many CDs have a minimum deposit, often around $500 to $1,000
- Provide your identifying information, including your name, address, Social Security number or ITIN, and a valid ID
- Leave your money untouched for the full term to avoid early withdrawal penalties
For example, if you open a 1-year CD with a 4.00% APY and deposit $1,000, you’d earn $40 in interest by the maturity date. When the term ends, you can withdraw your money, roll it into a new CD, or move it into a different savings option.
What Are the Different Types of CDs?
There’s a CD for nearly every type of saver. Here are the most common options:
- Traditional CD. Offers a fixed interest rate for the full term — you know exactly what you’ll earn at maturity.
- No-Penalty CD. Lets you withdraw early without a fee, but typically pays a lower rate than a traditional CD.
- Jumbo CD. Requires a larger minimum deposit — usually $100,000 or more — but offers higher interest rates in return.
- Bump-Up CD. Allows you to request a rate increase if interest rates rise during your term. Usually limited to one rate increase.
- Add-On CD. Lets you make additional deposits after the account is opened, giving you more flexibility to grow your balance.
- High-Yield CD. Offers some of the highest interest rates available, often found at online banks and credit unions.
- Step-Up CD. Your interest rate automatically increases at set intervals over the course of the term.
- Callable CD. Pays a higher rate, but the bank can close the account before maturity and return your principal and interest early.
What Are the Key Terms To Know With CDs?
- Annual Percentage Yield (APY). The interest rate you’ll earn on your CD over a year, factoring in compound interest — meaning you earn interest on your interest as well.
- Maturity date. The date your CD term ends. At this point, you can withdraw your funds, roll them into another CD, or move them elsewhere.
- Early withdrawal penalty. A fee charged if you take your money out before the maturity date. The amount varies by bank but is often calculated as a percentage of interest earned based on how long the account has been open. No-penalty CDs are an option if you want more flexibility.
How Do CDs Compare to Other Savings Options?
- CDs vs. High-Yield Savings Accounts. Both are safe, low-risk ways to grow your money. The key difference is flexibility — a high-yield savings account lets you withdraw funds at any time, while a CD locks your money in for the full term. If you might need the funds, a high-yield savings account is the better choice.
- CDs vs. Money Market Accounts. Money market accounts offer more liquidity than CDs — you can access your money as needed and still earn interest. Some money market accounts even allow check writing. CDs are better suited for money you’re confident you won’t need for a while.
- CDs vs. Treasury Bonds. Both offer a guaranteed interest rate over a fixed term. Treasury bonds are backed by the U.S. government rather than a bank, often come with longer terms than CDs, and carry certain tax advantages. CDs are typically more accessible and easier to open.
Are CDs Safe?
Yes. CDs at banks are FDIC insured up to $250,000, making them just as safe as a checking or savings account — you can’t lose your principal. At credit unions, CDs may be referred to as share certificates and are insured by the NCUA up to the same amount.
The only real risk with a CD is needing to access your money before the maturity date. Early withdrawal typically results in a penalty, which can eat into the interest you’ve earned.
How Do You Choose the Right CD?
Start by comparing interest rates and term lengths across different banks and credit unions. CD rates change frequently, so check current offerings before committing. A few things to keep in mind:
- Match the term to your timeline. Only lock up money you’re confident you won’t need for the full duration of the term.
- Compare APYs carefully. Some of the best CD rates can be more than three times the national average — usually at online banks and credit unions — so it pays to shop around.
- Check minimum deposit requirements. These vary by bank and term. A typical structure might look like this:
| Term | APY | Minimum Deposit |
|---|---|---|
| 12 months | 5.30% | $500 |
| 24 months | 4.50% | $500 |
| 36 months | 4.00% | $500 |
Is a CD Right for You?
A CD is a strong option if you’re looking for a low-risk, predictable return on money you don’t need immediate access to. The main benefits are:
- Guaranteed returns. Your rate is locked in from the day you open the account — market fluctuations don’t affect it.
- FDIC insurance. Your deposit is protected up to $250,000, just like a checking or savings account.
- Competitive rates. CDs often pay significantly more than standard savings accounts, especially for longer terms.
A CD is probably not the right fit if you’re building an emergency fund or may need the money before the term ends. In those cases, a high-yield savings account gives you the same security with more flexibility. If you have a longer time horizon and are comfortable with more risk, stocks or bonds may offer higher returns over time.
FAQs About CDs
Here's more on CDs and what you should know.- What is a certificate of deposit, and how does it differ from a savings account?
- CDs often pay more in interest, although online savings accounts are becoming quite competitive with CD rates. In many instances, you can earn more by locking your money in a CD than you can by depositing your money in a savings account, which offers a bit more flexibility in terms of when you can add or withdraw funds. Savings accounts don't usually have the same withdrawal restrictions as CDs. You can access the money whenever you'd like, but many banks prohibit more than six transactions of a certain kind each month.
- Are CDs a good investment for retirement planning?
- CDs could be a good option for retirees or for those looking to plan for retirement, as they provide a fixed rate of return and are thus considered fairly low risk. However, its earning potential might not outpace inflation or be as lucrative as, say, a true retirement plan. Retirement plans such as a 401(k) or an IRA invest in stocks and other similar investments, and tend to have higher returns. CDs, however, can be a good way to add to or diversify your retirement savings plan.
- Can I add funds to my CD after opening it?
- No, you cannot usually add funds to your CD after opening. The rate and the amount you've deposited are locked in until the CD matures.
- What happens when a CD reaches its maturity date?
- A CD may charge penalties if you take out the money before its maturity date, ranging from a few months’ interest to all of the interest earned.
- How does inflation impact CD returns?
- CDs might be a solid choice in the short term. Long-term, however, they may not hold up well against inflation. Although CD rates are fixed — and that guaranteed rate of return is reassuring — it doesn't take into account inflation.
- Inflation could outpace what you might earn on your CD. In other words, if the cost of living and the prices of goods increase, the CD rate might not be in line with those future costs. So you might want to diversify your investment in ways that can offer a higher yield in the long term.
Melanie Grafil, Cynthia Measom and Caitlyn Moorhead contributed to the reporting for this article.