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.
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 up 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 federally insured. Share certificates, which are the credit union version of CDs, are also low risk, as they’re insured through the National Credit Union Administration.
Editor’s note, August 2020: Many banks and credit unions continue to encourage customers to reach out if they’re experiencing any financial hardship caused by the coronavirus situation. This includes asking to waive early withdrawal penalties on CDs.
CDs vs. savings accounts
A CD is different from a traditional savings account in several ways.
“CDs have guaranteed returns.”
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. During the COVID-19 pandemic in particular, due to repercussions in the financial world, you may find higher rates for savings accounts than for CDs, depending on the bank.
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).
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
How does a CD work?
The process for opening a certificate of deposit starts off 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. 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 ends. (Or you can choose to receive regular interest payments, if the bank allows it.)
» Curious about CD returns? See our CD calculator
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.)
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. Not sure if it’s worth the hassle? It’s a more popular move than you might think: 45% of banking consumers have accounts with two or more financial institutions, according to a 2018 Mintel report.
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 in a couple of years, 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 rate for a five-year CD of 0.26% 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 for you 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
“A savings account is better suited for growing your wealth bit by bit.”
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. See our calculator and list of various banks’ CD early withdrawal penalties. FDIC and NCUA insurance doesn’t cover penalties.
When you’re building up savings. A CD requires a lump sum upfront and doesn’t let you add contributions over time. 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 safe?
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 in the event that a bank goes bankrupt. For more information, see this article on CD safety.
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 in-depth look at each type, learn about 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 — upward of $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 CD: With these CDs, you can request a higher rate if your bank increases its annual percentage yields, or APYs. These CDs 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.
Step-up CD: This option provides more predictable rate increases set by the bank, where APYs automatically go up at regular intervals. For example, rates on a 28-month step-up CD might go up every seven months.
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 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. Nowadays, 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.
Should I compare CDs beyond rates, terms and fees?
Yes: Consider giving a bank’s customer service team a call to see how helpful they are. One of the biggest reasons people switch banks is poor customer service, according to a 2019 report by Mintel.
What happens when a CD matures?
When a CD matures, or expires, there’s a grace period of around a week in which you can withdraw funds. After that period, many CDs automatically renew for the same term it had previously, and withdrawals before the next maturity date are subject to a penalty.
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?
No, interest rates have dropped in recent months as the pandemic continues. For more context on recent rates, learn about 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.
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.)
“With laddering CDs, you invest in a variety of term lengths.”
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.
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.