What Is a CD (Certificate of Deposit)?

A CD is a type of savings account with a fixed rate and term. They can have higher rates than regular savings accounts.
Spencer TierneyOct 5, 2021
What Is a CD (Certificate of Deposit)?

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Key takeaways:

  • A CD is a type of savings account with a fixed time period and interest rate.

  • CDs tend to have higher rates than regular savings accounts but don’t allow easy access to your money until a term ends.

  • Consider a CD for two reasons: to have guaranteed returns without much risk and to have a safe place for savings earmarked for future use.

CD definition: What is a CD?

A CD, or certificate of deposit, is a type of savings account with a fixed interest rate that’s usually higher than a regular savings account, a fixed term length and a fixed date of withdrawal, known as the maturity date. You lock funds in a CD for a term generally between three months and five years. CDs typically don’t have monthly fees, but most have an early withdrawal penalty.

Like regular savings accounts, certificates of deposit are insured by the Federal Deposit Insurance Corp. Share certificates, which are the credit union version of CDs, are insured by the National Credit Union Administration.

Compare the best CD rates
See which banks and credit unions offer high-yield CDs right now.

What does CD stand for?

CD refers to certificate of deposit, which was historically a paper document that showed proof that your funds were held in a bank at a certain rate. These days, CDs don’t usually come with a paper, but your funds are still held and federally insured up to $250,000 per account at banks and credit unions.

CDs vs. savings accounts

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

  • CDs tend to have higher rates than regular savings accounts. 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. 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 no-penalty CDs, discussed later in this article.)

How does a CD work?

The process for opening a certificate of deposit starts the same way as for other bank accounts: Apply online or in person at a financial institution. The key difference is that your initial deposit into a CD will almost always be the only deposit you can make. You can’t add contributions over time like you can with a regular savings or checking account.

» Curious about CD returns? See our CD calculator

The interest earned in a CD is usually compounded and credited to the account, either daily or monthly, and you receive it all when the CD term ends. (Or you can choose to receive regular interest payments if the bank allows it.)

Once a CD’s term ends, a bank will typically renew your CD at a new rate, which tends to match that of new CDs for the same term. This might not be in your best interest, since it’s better to compare the best CD rates each time you open a new CD. (See our article for more details on when CDs mature.)

What CD term should I get?

This depends on your savings goals. Traditionally, the longer the term length — the longer you commit funds to a CD — the higher the interest rate.

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

Where to open a CD

Opening a CD with one of the best rates might mean joining a bank or credit union outside of your primary financial institution, such as an online bank. That move can be worth it, especially to get far better rates than you’d get at traditional banks. More than one in five Americans who are saving money have opened a savings account with an online-only bank during the period from the start of the COVID-19 pandemic to December 2020, according to a study by NerdWallet and Goldman Sachs.

When to choose a CD

  • 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 0.06%, far below the average rate for a five-year CD of 0.27% annual percentage yield, according to the Federal Deposit Insurance Corp. (See much higher yields on our roundup of the best five-year CD rates.)

Besides 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. (See the best six-month rates for this month or the best three-month rates.)

When to stick with a savings account

  • 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.

» For some of the highest rates, check out NerdWallet’s best savings accounts

Are CDs worth it?

Focus on the reasons you want a CD. Do you have a lump sum of money to save for a big purchase in a few years? Or do you have some savings earmarked for investing down the road? CDs provide a place to lock away a sum. Learn more about whether CDs are worth it.

You don’t want to base your decision solely on what rates are available, but it’s helpful to know where rates are going. Before and during the first year of the COVID-19 pandemic, CD rates mainly dropped or remained steady. But since July 2021, there have been some signs of high-yield CD rates climbing.

Are CDs FDIC insured?

Yes, CDs are federally insured by every bank and credit union that has deposit insurance. Up to $250,000 is guaranteed to be returned to you if a bank goes bankrupt. For more information, see this explainer on FDIC insurance for CDs.

What types of CDs are there?

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. (Check the top CD rates.)

  • 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 most cases, you can request only one rate increase, although long-term CDs may let you do so twice.

  • 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 explainer.)

What happens when a CD matures?

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 term they had previously, and withdrawals before the next maturity date are subject to a penalty. Learn more about your options when CDs mature.

What if I need to withdraw from a CD early?

When you withdraw early from most CDs, 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. If you need to withdraw early due to financial hardship, contact your bank to see if it can help. Here’s a list of big banks that provided assistance to customers during the COVID-19 crisis.

How do CD rates work?

CD rates are in terms of annual percentage yield, or APY. This is the annual interest rate after compounding. And compounding is when your account earns money off both the original deposit and the increasing interest.

» See the value of high rates with our CD comparison calculator

Are CD rates going up?

Somewhat. Rates on some high-yield CDs, typically available at online banks, have risen slightly since July. For more context on recent rates, see current CD rates. If you want a broader understanding of CD yields over decades, take a look at historical CD rates.

What is a CD ladder?

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. (To compare short-term options, see our list of the best one-year CDs. Or if you’re building a longer ladder, see three-year CDs.) 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.

See CD rates by term and type

Get a closer look at the best rates on certificates of deposit:

See CD rates by bank

If you’re curious about all the features of CDs at specific banks, here’s a quick list of both traditional and online banks’ CDs (and one brokerage’s offering):

Summary: CDs offer low risk, some reward

Investing in a certificate of deposit isn’t the quickest way to grow your money, but it offers a guaranteed return and safety that money in the stock market doesn’t have. A CD with a good rate can play an important role in your overall savings plan.

By choosing the right type of CD, taking advantage of a laddering strategy and avoiding withdrawal penalties, you can earn a solid return on your money, all while having your savings backed by the federal government.

Article Sources

1. Federal Deposit Insurance Corporation. “National Rates and Rate Caps.” https://www.fdic.gov/regulations/resources/rates/ Accessed Sept 20, 2021.

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