What Is a CD (Certificate of Deposit)?

A CD, or certificate of deposit, is a type of savings account with a fixed interest rate that’s usually higher than the rate for a regular savings account. A CD also has a fixed term length and a fixed withdrawal date, known as the maturity date. You lock funds in a CD for a term generally ranging from three months to five years. Flipping the traditional trend of longer terms having higher rates, rates on one-year CDs have been higher than on five-year CDs as of late. CDs don’t have monthly fees, but most have an early withdrawal penalty and don’t let you add funds after the initial deposit.

» COMPARE: Best CD rates

Like regular savings accounts, certificates of deposit are insured, so you get your money back in the unlikely event your bank goes bankrupt. CDs at banks are insured by the Federal Deposit Insurance Corp.^[0]

Share certificates are the name for CDs at credit unions, the not-for-profit equivalent of banks. Certificates at credit unions are insured by the National Credit Union Administration^[0]

CD rates are high largely thanks to Fed rate increases in 2022 and 2023, which can impact when banks change CD rates. See more details about what to expect in 2024 in our CD rates forecast.

• You want to protect designated savings. If you have money set aside for a large future purchase such as a car or down payment, a certificate of deposit can be a good way to keep it safely out of reach and let it earn interest.

• You want returns without much risk. Investing in CDs can make sense if you want to avoid the volatility of the stock market and earn a return that’s typically better than other savings accounts. The national average rate for a regular savings account is 0.46%, far below the average rate for a five-year CD of 1.42% annual percentage yield, according to the FDIC. You can estimate returns using a CD calculator.

Beside the five-year CD, another route is to go for high-yield three-month, six-month or one-year CDs, which might be better if you’d rather wait months instead of years for access to your funds. If you want to know whether a savings account is better for you, skip ahead.

» Want returns and funds access? Consider the best high-yield savings accounts

Consider each part of a CD to help break down your decision:

1. CD term: Most terms at a bank or credit union range from three months to five years. Traditionally, longer-term CDs have higher rates than shorter-term CDs. Learn how to choose your CD term.

2. CD type: Some CDs have an unusual feature, such as a no-penalty CD that doesn’t charge for early withdrawals or a bump-up CD that allows for a rate increase during a term. High-yield CDs work like standard CDs but have the best rates and are often at online banks. Skip down to see types of CDs.

3. CD rate: Once you’ve narrowed down the term and type of CD, you can compare banks and credit unions to find a competitive rate. You may decide to go with a bank you already have accounts at or choose a new institution, depending on whether convenience matters to you, but aiming for a high rate is ideal. See current CD rates.

4. CD deposit: The amount you put into a CD depends on your savings goals, but you want to aim for more than a CD’s opening minimum requirement. You usually can’t add more money after the initial deposit. And, if you’re worried about the risk of a bank failing, keep less than the FDIC insurance limit of $250,000 in your accounts to keep your money protected. Learn how to choose your CD deposit.

» Not sure how to open a CD? Here's a step-by-step guide to opening a CD account

CDs typically come with a fixed term and a fixed rate of return. But depending on where you bank, you may have access to a few other varieties. (For a more exhaustive list of each type, see the nine types of CDs.)

• No-penalty CD: This CD, also known as a “liquid CD,” lets you withdraw early without an early withdrawal penalty in exchange for typically lower rates than other CDs. (See our list of the best no-penalty CDs.)

• High-yield CD: This CD has higher-than-average CD rates. Online banks and credit unions typically offer better rates than traditional brick-and-mortar banks. (Learn more about high-yield CDs.)

• Jumbo CD: This is essentially the same as a regular CD, but with a high minimum balance requirement — historically $100,000 — as a trade-off for traditionally higher rates. (See more details about jumbo CDs.)

• IRA CD: This is a regular certificate that is held in a tax-advantaged individual retirement account. (See our list of the best IRA CD rates.)

• Bump-up or step-up CD: These CDs usually have a jump to a higher interest rate during the CD term. Bump-up CDs require you to ask for that rate jump, if available, while step-up CDs work on a fixed schedule of rate increases. Both types typically have lower interest rates than fixed-rate CDs, and some carry steeper minimum deposit requirements. In some cases, you can request only one rate increase, although long-term CDs may let you do so more than once. (Learn more about bump-up and step-up CDs.)

• Brokered CD: This is a CD offered at a third party, or broker, such as a brokerage firm. (Learn more about types of brokered CDs, including callable CDs, in our brokered CDs explainer.)

When a CD matures, or expires, there’s a grace period of about a week in which you can withdraw funds. After that period, many CDs automatically renew for the same or similar term they had previously, but the rate will likely be based on the rate for new CDs of that term, not your CD's original rate. Withdrawals before the next maturity date are subject to a penalty. Learn more about your options when CDs mature.

If you withdraw before a CD matures, however, you tend to pay a penalty that consists of several months to a year’s worth of interest. See our calculator with a list of various banks’ CD early withdrawal penalties.

A CD ladder is a type of saving strategy that involves opening both short- and long-term CDs. This provides more flexibility than putting cash in one CD, so you can go for the higher rates of a three- to five-year CD and still have regular access to some of your money over time.

» Learn more about three types of CD strategies

Here’s how it works: You invest proportionally in a variety of term lengths. Then, as each shorter certificate matures, you reinvest the proceeds in a new long-term CD.

Let’s say you have $10,000 for CDs. You invest $2,000 apiece in one-, two-, three-, four- and five-year CDs. When the one-year CD matures, you put that money into a new five-year CD. The next year, you reinvest funds from the matured two-year CD in another five-year CD. You can repeat the process until you have a five-year CD maturing every year, or opt to withdraw penalty-free from whatever CD is maturing a given year if you need some cash.

A CD is different from a traditional savings account in several ways.

• CDs tend to have higher rates than regular savings accounts. These rates are higher in exchange for no access to that money during a CD's term. The combination of CDs’ low risk and high rates compared to other bank accounts can make them an attractive investment. That said, check out the best high-yield savings accounts if you want the flexibility of adding funds over time or taking advantage of higher rates.

• Savings account rates change over time; CD rates stay fixed once you open a CD (with the rare exception of a step-up or bump-up CD). This can be an advantage: CDs have guaranteed returns, and if you open a CD when interest rates are high, you can enjoy that rate even if banks drop rates on savings accounts and new CDs.

• Savings accounts give regular access to your money; CDs don’t. You can deposit and withdraw from a savings account relatively freely, but the only time you can withdraw from most CDs penalty-free is during a short period of days after a term ends. (The only exception is a no-penalty CD.)

• For savings you might need in a pinch, including your emergency fund. Breaking into a CD early and paying a penalty can be a blow to your savings.

• When you’re building up savings. A CD requires a lump sum upfront and most don’t let you add contributions after the initial deposit. A savings account is better suited for growing your wealth bit by bit.

» COMPARE: Check out NerdWallet’s best savings accounts

CDs can let you earn a solid return on your money, all while having your savings backed by the federal government. However, they’re not always the right fit.