Editor’s note, March 23, 2020: Many banks and credit unions are temporarily waiving early withdrawal penalties for CDs in response to widespread financial distress caused by the coronavirus situation. To find out if your bank or credit union is one of them, call its customer service line.
What is a CD?
A CD, or certificate of deposit, is a bank account with a fixed interest rate that’s generally higher than that of regular savings accounts, and a fixed date of withdrawal, known as the maturity date. Like regular savings accounts, CDs are federally insured. They typically don’t have monthly fees, but most have an early withdrawal penalty.
Share certificates, which are the credit union version of CDs, are also low risk, as they’re insured up to the same amount through the National Credit Union Administration.
A CD is different from a traditional savings account in several ways.
- Savings accounts let you deposit and withdraw funds relatively freely. But with a CD, you typically agree to leave your money in the bank for a set amount of time, called the term length, during which time you can’t access the funds without paying a penalty.
- Term lengths can be as short as a few days or as long as a decade, but the standard range of options is between three months and five years.
The longer the term length, the more you will earn.
The longer the term length — the longer you commit to keeping your money in the account and thus with the bank — the higher the interest rate you’ll earn. Some of the best five-year CDs have rates above 2.20% APY. Here’s a quick look at some of the highest CD rates at online banks:
» Ready to check out CDs? See our list of the highest CD rates this month
Most CDs come with fixed rates, meaning annual percentage yields are locked in for the duration of the term. There are a few exceptions that we will explore below.
Why you might benefit from a CD
Higher rates than regular savings accounts usually. CDs can pay off for folks who are certain that they won’t need access to that cash during the duration of the term length. A five-year CD with a 2.20% APY — among the highest rates you’ll find — will earn around $575 on a $5,000 deposit. Keep the same amount in a savings account that earns a top-notch rate of 1.80%, and you’d earn around $460 after five years. (And either option pays more than a five-year CD with a rate at or below the national average of 0.45% annual percentage yield, according to the Federal Deposit Insurance Corp.)
Opening a CD with one of the best rates might mean joining a bank or credit union outside of your primary financial institution. 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.
Besides the five-year CD, another route is to go for high-yield three-month, six-month or one-year CDs, which might work 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 more access to your money, without an early withdrawal penalty. If you end your commitment early by withdrawing the money before the CD matures, you’ll likely be charged a penalty. It varies, but typically you’ll give up several months’ to a year’s worth of interest accrued.
If there’s a chance you’ll need that cash to cover an emergency, skip the CD and stick to a high-yield savings account.
Take note of any such penalty on a CD before choosing to withdraw early. FDIC and NCUA insurance doesn’t cover penalties incurred by withdrawing money early. If there’s a chance you’ll need that cash to cover an emergency, skip the CD and stick with a high-yield savings account.
» For some of the highest rates, check out NerdWallet’s best online savings accounts
Specialty CDs: Other types of CDs
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.
- 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 tradeoff for 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 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.)
FAQs: More about CDs
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.
Besides rates, terms and types of CDs, is there another factor I should check when comparing CDs?
Yes, consider giving a bank’s customer service team a call to see how helpful they are. One of the biggest reasons why 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
CD ladders provide flexibility
Some savers might want the higher rates of a three- to five-year certificate but are wary of tying up their money for such a long time. That’s where “laddering” can come in handy. 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, you invest in a variety of term lengths.
Say you have $10,000. With that cash you invest $2,000 apiece in one-, two-, three-, four- and five-year CDs. When the shortest-term certificate matures after one year, you put that money into a new five-year CD. The next year, you reinvest the funds from the matured two-year certificate in another five-year CD. Repeat the process until you have a five-year CD maturing every year. At that point, you’ll have the flexibility of cashing out one certificate a year without facing early withdrawal penalties.
CDs offer low risk, some reward
Investing in a certificate of deposit isn’t the quickest way to grow your money, but it’s not terribly risky, either. 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.
2. Mintel. “Retail Banking and Credit Unions–US, Feb. 2018.” p. 31, https://reports.mintel.com/display/860247/ Accessed Feb. 21, 2020.
3. Mintel. “The Banking Experience–US, Feb. 2019.” p. 38, https://reports.mintel.com/display/918510/ Accessed Feb. 21, 2020.