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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.
Banking, Banking Basics, CDs
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How do CDs work?

Certificates of deposit are a form of time deposit, an arrangement in which 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.”

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. Depending on your circumstances, you may benefit from a particular type of CD, such as a jumbo CD, which has a high minimum-balance requirement, or an individual retirement account CD held in a tax-advantaged account. (See our explainer that spells out the differences among CD types.)

When should I get one?

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.

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.

Here’s how penalties work and ways to avoid them.

» 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 was 0.33% for banks as of March 2018, according to the FDIC.

Our CDs roundup also highlights the best rates available by month, with some rates nearing 3% APY.










1-year APY


2.20%



3-year APY


2.35%


5-year APY



2.80%



Minimum deposit



$500






1-year APY


2.20%



3-year APY


2.35%


5-year APY



2.80%



Minimum deposit



No minimum






1-year APY


2.25%



3-year APY


2.55%


5-year APY



2.85%



Minimum deposit



$2,000




Compare more banks and CD rates here

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 and generally more profitable than savings accounts, so they’re 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.)

Amber Murakami-Fester is a staff writer at NerdWallet, a personal finance website. Email: amufe@nerdwallet.com