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Opening a certificate of deposit is a solid way to get guaranteed returns on your money with little risk. CDs tend to have the highest interest rates among bank accounts and are federally insured, unlike investments kept in stocks and bonds. Here’s a step-by-step guide to opening a CD.
How to open a CD
1. Find a CD that’s right for you
A good starting point is to compare CD interest rates online across federally insured banks and credit unions and keep three other factors in mind: CD term, CD type and who owns the CD.
CD terms generally range from three months to five years, so decide how long you want to commit to locking up your money. (See how to choose a CD term.)
CD types also have variety, but regular CDs are the most common. You generally must seek out which banks offer specialty CDs such as no-penalty or add-on CDs. (Learn about 9 types of CDs.)
Single or joint account. As with other bank accounts, you can open a CD by yourself or with someone else, such as a spouse. Note that the insurance limit for the Federal Deposit Insurance Corp. (for banks) and National Credit Union Administration (for credit unions) is generally $250,000 per person and, it’s doubled for joint accounts.
Note: Credit unions refer to CDs as share certificates or certificates, and the earnings are called dividends instead of interest.
2. Choose how you’ll apply
Depending on the bank, you can open a CD online, over the phone or in person at a branch. Some banks encourage you to apply online and others require that you visit a branch. If you’re able to apply online, the process can take 10 to 20 minutes, though this may vary.
3. Have your identification ready
Expect to give one or two forms of ID, plus your residential address — which usually has to be in the U.S. — and contact information, including a phone number and email address.
4. Choose how you want interest disbursed
Many financial institutions offer two options: receive all interest at the end of a CD’s term or disburse regularly, such as monthly or annually. If you want to maximize interest, opt to receive it at the end.
5. Make the opening (and only) deposit
Unlike with a savings account, you won’t be able to continually add money to a CD. You’ll put down a set amount and leave it untouched until your CD’s term ends. You’ll most likely fund the CD by linking another bank account and transferring money, mailing a check or depositing a check when opening a CD at a branch.
» Ready to compare? Check out NerdWallet’s list of the best CD rates this month
Additional tips for opening a CD
Look at APY, not interest rate, when comparing rates. APY shows the interest earned including compound interest; an interest rate doesn’t include compounding, which factors in the initial deposit plus previous interest earned into the CD .
If you choose a credit union for a CD, you’ll have to become a member first. Credit unions, the not-for-profit equivalent of banks, require membership to open an account. To be eligible for membership, you might have to live in a specific geographic area, have a certain employer or make a small donation to an affiliated nonprofit organization, among other things.
The longer the term, the higher the rate typically. If your time frame to get your money back is flexible, remember that going for a five-year term instead of a three- or four-year term might earn you more money. However, rates may be the same for various terms depending on the bank.
Your CD’s rate stays constant. Unlike a regular savings account, a CD has a fixed rate once you fund it. Banks and credit unions change their rates on new CD offerings in response to changes from the Federal Reserve’s rate, among other factors. (Learn more about the role of the Fed in our explainer on how Fed rate increases affect CDs.)
Know what your CD’s early withdrawal penalty is. Ideally, you won’t need to break the seal on your CD before it matures, but if you do, it’s better to know what it will cost you. Most CDs have a penalty that consists of several months’ to a year’s worth of interest. (See NerdWallet’s early withdrawal penalty calculator and penalties at various banks.)
Create a reminder for the CD’s maturity date. Typically there’s a short window of seven to 10 days after the CD’s term ends for you to get your money back penalty-free. Otherwise, your CD may automatically renew for the same term but with a new rate, which will likely match what the bank is offering on new CDs of that term.
If you're worried about missing higher long-term rates later, consider a CD ladder. When rates are low or on the rise, a CD ladder might be a good option. You open several CDs of different terms — say, one year, two years and three years — and each time one CD matures, put the money into a new long-term CD. Or you can withdraw after a CD term ends. The strategy gives you regular access to part of your CD funds and lets you take advantage of higher rates.