Many savers choose certificates of deposit (CDs) for the benefits of a guaranteed return, which makes CDs a safe, reliable way to earn some interest on your money. In exchange for a fixed annual percentage yield (APY) — and the peace of mind that comes with it — the bank requires you to keep your funds in the CD for a set period of time, or term.
CDs sometimes earn higher interest rates than high-yield savings accounts, but they aren’t as liquid. When you open a CD, you agree to leave the money untouched for the term or you’ll have to pay a penalty for withdrawing funds early.
You can open a CD at banks and credit unions, though credit unions often call their version of CDs share certificates.
How CDs work
A CD is a type of savings account commonly offered by banks and credit unions. Unlike regular savings accounts and money market accounts, CDs typically guarantee the same APY for a set amount of time, or term. In exchange for this peace of mind, the bank requires you to leave the money untouched throughout the term, charging an early withdrawal penalty if you need access to the funds sooner.
CD terms commonly range from three months to five years, though you can find terms that are longer. In addition to traditional CDs that work like described above, some banks also offer specialty CDs such as no-penalty CDs, step-up CDs and bump-up CDs (which are all covered below).
It pays to become familiar with them if you want to find the one that best fits your goals.
CD basics: Important factors to consider
Here are several factors to consider when shopping for a CD.
CD terms
When deciding upon the best term for you, consider when you’ll want access to the money. If you’re planning to use the money for a down payment on a house in around a year-and-a-half, an 18-month CD could be a good choice.
CDs commonly come in terms of three, six, nine, 12, 18, 24, 36, 48 and 60 months. In addition to standard term lengths, some banks and credit unions issue CDs with unconventional terms, such as seven, 13 or 17 months. Banks often assign such irregular terms to no-penalty CDs or to promotional CDs, which are typically offered for a limited period of time and offer highly competitive yields.
Savers can reap the benefits of a whole range of CD term lengths by building a CD ladder. This enables you to lock in some rates for longer (especially helpful if they’re high rates), while still having access to some of your funds again sooner through the shorter-term CDs.
CD rates
After you find the term that works for your money goals, the next thing to consider is the APY. Thanks to a CD’s fixed APY, you can determine up front exactly how much interest it’ll earn by the time it matures.
These days, many shorter-term CDs are earning higher rates of return than their longer-term counterparts. When comparing APYs across terms, however, it’s important to calculate the total interest you’ll earn. Due to the time factor, a longer term CD with a lower APY might earn more total interest than a shorter term with a higher one.
Use Bankrate’s CD calculator to try on different scenarios to see how much you can earn with different CD terms and APYs. And note that oftentimes, the best CD rates can be found at online-only banks.
For instance, if you deposit $10,000 into a one-year CD that earns 4.40 percent APY, you’ll earn around $440 in interest. But if you deposit that $10,000 into a three-year CD that earns a lower APY of 4.15 percent, you’ll earn almost $1,298. So you’ll earn around $850 more with the longer CD, despite the shorter one having a higher APY.
When looking at APYs associated with different term lengths, take into account what experts are predicting regarding the future of CD rates. For instance, if rates are expected to rise soon, committing to a three-year CD now could mean you’ll miss out on being able to lock in higher rates in the near future.
A CD’s rate can be influenced by a number of factors, such as the term’s length and a bank’s need for deposits. The macroeconomic environment often also plays a role, with many CDs’ APYs moving in lockstep with changes the Federal Reserve makes to its key benchmark rate.
CD early withdrawal penalties
Though ideally you can choose a CD term that meets your timeline, you may need (or want) to take money out of your CD before it matures. If you anticipate this at all, it’s a good idea to investigate the bank’s early withdrawal penalties.
The amount of the penalty may vary. For example, one bank may charge a penalty of 60 days’ worth of interest for a one-year CD, whereas another bank charges 180 days’ worth. Typically, CDs with longer terms will charge higher penalties.
Ultimately, the amount you’ll pay depends on the bank’s policy and how much money is in the CD.
CD penalties could cost you part of your principal
It’s possible to lose part of your initial deposit in a CD if your early withdrawal penalty exceeds the interest earned.
For instance, if you have to pay a penalty of 90 days’ worth of interest and you’ve only earned 60 days’ worth to date, the remaining 30 days’ worth of interest would be taken out of your principal.
Types of CDs
There are many varieties of CDs, giving you lots of options for managing your money. Here’s a quick look at some of the most common types of CDs.
Traditional CD
A traditional CD requires a one-time deposit that meets the bank’s minimum deposit requirement. It has a fixed term and a fixed APY. Traditional CD rates sometimes beat those on regular savings accounts, although this isn’t always the case.
No-penalty (liquid) CD
This product allows you to withdraw funds early without a fee. Banks have different withdrawal parameters. No-penalty CDs generally pay a lower APY than traditional CDs, in exchange for allowing for early withdrawals.
Bump-up CD
A bump-up CD allows you to take advantage of a rising rate environment. If your bank raises rates after you bought a CD at a lower rate, you can request the higher rate for the remainder of the CD term.
Step-up CD
With a step-up CD, the bank automatically raises your rate by a predetermined amount at certain intervals during the CD term.
IRA CD
An IRA CD is held in a tax-advantaged individual retirement account (IRA) and appeals to those willing to sacrifice higher yields for safety and guaranteed returns to build their retirement nest eggs.
Are CDs safe?
Like savings accounts, CDs are safe investments. They are federally insured when they’re offered from banks insured by the Federal Deposit Insurance Corp (FDIC) or credit unions insured by the National Credit Union Administration (NCUA) Share Insurance Fund.
Insurance limits are $250,000 per depositor, per insured institution, per ownership category. (Ownership categories include single accounts and joint accounts.) So as long as your balance doesn’t exceed those guidelines, you won’t lose money if the insured bank or credit union closes. If you’re looking to deposit more than the amount covered, consider spreading funds across multiple ownership categories or multiple banks to insure the full amount.
How to open a CD
Opening a CD, whether at a bank or credit union, involves choosing a type of CD, picking a term and APY that meets your financial goals and then funding the CD. Many banks allow CDs to be opened online.
Whether you open an account online or by visiting a bank or credit union in person, you’ll need to provide information such as your Social Security number (or Individual Taxpayer Identification Number), driver’s license, address and date of birth. You’ll also need to fund the account if there’s a minimum opening deposit requirement.
How much should you invest in a CD?
The amount of money you decide to park in a CD depends on your financial situation, goals and timeline. CDs usually have minimum deposit requirements, though they vary among banks. Some banks, like Ally Bank and Capital One, require no minimum deposit amount for CDs.
Other banks, like Quontic Bank and Marcus by Goldman Sachs, require $500 to open a CD.
Jumbo CDs require much bigger deposits, some as high as $100,000 or more.
Just be careful not to put all of your money in CDs. While rates on high-yield CDs are currently outpacing the rate of inflation, money in an account could lose purchasing power if the rate is below that of inflation.
What’s more, it’s important to keep some of your money in a liquid high-yield savings account, where you can access it easily in the event of an emergency.
What happens when my CD matures?
The end of a CD’s term is called the maturity date. Around this time, most banks provide a grace period of around 10 days, during which you can tell the bank what to do with the money.
You can collect the principal and interest at this time, and then deposit it into a new CD, another type of bank account or other investments such as stocks and bonds.
If you do nothing when your CD matures, the bank will often renew the CD at its current APY for the same term or a similar one. Keep in mind the new rate might be different from the rate you earned when you first opened the account. Therefore, it’s important to determine whether this new rate is competitive before you allow the CD to be renewed automatically.
To avoid missing your CD’s maturity date, set up a calendar alert for when the date is approaching, and pay attention to any notifications on your bank statements regarding your CD’s term ending. If you’re not sure when the CD matures, contact your bank’s customer service or visit a branch.
Bottom line
CDs are a reliable investment option for savers looking for a guaranteed return with minimal risk. For the safety of your funds, be sure to choose an FDIC-insured bank or a credit union insured by the NCUA. This way, your funds are safe should the institution fail.
And remember that CDs typically lock in your funds for the term you choose and charge a penalty for withdrawals before the term ends. If you can afford to lock up part of your savings and think this type of account is right for you, make sure to shop around for a competitive APY at a term that suits your needs.
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