How Do CDs Work? Learn How to Save Smarter

Certificates of deposit lock up your money for a set period. In return, you earn higher interest than what's available on most savings accounts.

Amber Murakami-FesterSeptember 28, 2018

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How do CDs work?

Certificates of deposit are a secure form of time deposit, where money must stay in the bank for a certain length of time to earn a promised return.

A CD, also called a “share certificate” at credit unions, almost always earns more interest than a regular savings account. Banks and credit unions pay extra for the right to hold a lump sum for a period of months or years, known as the CD’s “term.”

» Skip ahead to see three solid picks for CD rates.

The Federal Deposit Insurance Corp. or National Credit Union Association insures your CD up to $250,000, just as with any deposit account. So the only risk to you is the penalty you'd have to pay if you withdrew the money before the CD term was up

The longer the term, the higher the interest rate.

As a rule, the longer the term, the higher the interest rate. Putting more money into your CD can also boost your annual percentage yield, the effective return on your deposit that comes from compounding the interest over the course of a year.

You’ll earn interest on the deposit until it matures, at which point you can collect the full amount. But if you need funds in a CD before the maturity date, there's generally a penalty. See our post on specific early withdrawal penalties by bank, plus a calculator.

» Learn more about compound interest and how it can boost your savings

Depending on your circumstances, you may benefit from a particular type of CD, such as an individual retirement account CD held in a tax-advantaged account, or a jumbo CD, which has a high minimum-balance requirement — often $100,000 — in exchange for slightly higher rates. (For a deeper dive, see our explainer that spells out the differences among CD types.)

When should I get a certificate of deposit?

CDs work best for savers who have the financial breathing room to sock away money for years at a time. You'll also need to be able to meet any minimum deposit requirements, typically $500 or $1,000.

But you might consider short-term CDs too, especially if you want to take advantage of high rates now. (See our recommendations for one-year CDs or, if you're looking for even shorter terms, six-month CDs.)

When deciding on a deposit amount and a term length, consider your other financial commitments and your time horizon. Make sure you’ve already banked enough emergency savings — ideally three to six months’ worth of living expenses that you can access easily in time of need. By contrast, any money you put into a CD will be locked down until the end of the term; withdrawing it ahead of time means you'll pay a penalty.

» If you’re ready to compare rates, below is a sampling of banks with high-yield CDs. By comparison, the average rate for a non-jumbo CD (under $100,000) with a one-year term is less than 1%, according to the FDIC.

Marcus by Goldman Sachs CD

Marcus by Goldman Sachs High-Yield CD

Barclays CD

Barclays Online CD

Synchrony Bank CD

Synchrony Bank CD

NerdWallet rating 
NerdWallet rating 
NerdWallet rating 
Read reviewRead reviewRead review
1-year APY

0.85%

With $500 minimum balance

1-year APY

0.40%

With $0 minimum balance

1-year APY

0.60%

With $2,000 minimum balance

3-year APY

0.85%

With $500 minimum balance

3-year APY

0.40%

With $0 minimum balance

3-year APY

0.75%

With $2,000 minimum balance

5-year APY

0.90%

With $500 minimum balance

5-year APY

0.40%

With $0 minimum balance

5-year APY

0.90%

With $2,000 minimum balance

Minimum Balance

$500

Member FDIC

Minimum Balance

$0

Member FDIC

Minimum Balance

$2,000

Member FDIC

» Ready to see more? Check our list of the highest CD rates available this month.

How much more could I be earning?

As shown in our sampling of banks above, online banks are generally offering competitive CD rates.  Brick-and-mortar banks are lagging.  So if you want the highest rates, it's a good idea to comparison shop.

Midrange CDs — with terms of one to five years — are safer than stocks since your money is insured, and they're generally more profitable than savings accounts. That makes them a viable middle-of-the-road investing option. You can use our CD tool to find and compare term lengths and rates. If you need the flexibility you’d get with a shorter term but the available CD rates seem only so-so, you may be better off putting your money in a high-interest savings account. (To get an idea of what you can earn, see our list of top high-yield online savings accounts.)

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