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High-Yield CD: How It Works

Feb. 11, 2020
Banking, CDs
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Like many things you shop for, certificates of deposit aren’t all the same. One CD might earn you hundreds of dollars in interest while another gives you literally one dollar. The big difference comes down to the interest rate, and the best CDs are high-yield CDs.

» Ready to compare? See the best CD rates this month

What is a high-yield CD?

A high-yield CD is a CD with one of the highest interest rates available across financial institutions. What counts as the highest rate varies over time, since banks and credit unions may adjust their rates when the Federal Reserve changes its rate.

Once you open a high-yield CD, you lock into that rate for a term, usually from three months to five years. These CDs, like regular CDs, are federally insured up to $250,000 per account holder.

Common features of a high-yield CD

They’re mainly available at online banks. High-yield CDs are generally found at online banks and credit unions, which can afford to offer higher rates than brick-and-mortar banks in part because they don’t pay the costs to maintain branches or branded ATMs.

They have high interest rates. There’s no exact threshold, but if you’re looking at a CD rate well above 1% annual percentage yield, it’s safe to say that’s probably a high-yield CD. A CD rate usually is written as annual percentage yield, or APY, which is the interest rate that factors in compounding.

They require low opening deposits. Many high-yield CDs have minimum deposits at or below $5,000, and some don’t even have a minimum. Jumbo CDs, in contrast, typically require at least $100,000 without offering better rates than high-yield CDs. (If you’re curious, see our list of the best jumbo CDs).

Rates: Regular vs. high-yield CDs

Online bank CDs can have yields more than double the national average. And generally the longer a CD term, the higher the rate tends to be, but this isn’t always the case. A bank may focus on attractive rates on short-term instead of long-term CDs.

Here’s a look at the national average CD rates compared with a few online banks’ rates.

CD termCD APY: national averageCD APY: 3 online banks*
1-year CD0.48%2.05%, 2.00%, 1.85%
3-year CD0.75%2.10%, 2.05%, 1.95%
5-year CD0.95%2.15%, 2.15%, 2.00%
*Banks: Marcus by Goldman Sachs, Citizens Access and TIAA Bank

High-yield CD vs. high-yield savings

CDs aren’t the only banking product that can be called “high yield.” You’ll also find high-yield savings accounts, which tend to offer lower rates than high-yield CDs. Similarly, regular savings accounts generally have lower yields than regular CD rates. Here’s how these accounts differ:

CDs don’t allow any withdrawals until the term expires. If you withdraw early, there’s usually a penalty. (See our explainer on how much this penalty can cost.)

A savings account lets you withdraw six times a month, though it can be more depending on how you withdraw. Online transfers factor into this limit, while ATM withdrawals, if available at your bank, don’t count. Having this access to your money means a lower rate.

Bottom line: Go for a high yield

You can find CDs at most banks (and the equivalent — share certificates — at credit unions), but you don’t have to get a CD where you have your checking or savings account. In fact, you might benefit from comparing CD rates outside your main bank if it doesn’t offer high-yield CDs.

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