Saving money in a traditional account? You’re probably earning next to nothing in interest. Certificates of deposit (CDs) offer a simple way to lock in higher returns—if you’re willing to let your money sit for a while.
A CD is a savings account with a fixed interest rate and a set term length. You agree to leave your money in the account until it matures, and in exchange, the bank pays you more interest than a typical savings account.
CDs are gaining popularity again as interest rates rise. Whether you’re looking for a short-term boost or planning ahead for a few years, a CD could be a smart way to grow your savings without taking on risk. Here’s how they work, what to watch out for, and how to choose the right one.
What is a certificate of deposit, and how does it work?
A certificate of deposit (CD) is a savings account that pays a fixed interest rate in exchange for keeping your money locked in for a set period of time. It’s different from a regular savings account or money market account because you agree not to touch the money until the CD matures.
When you open a CD, you choose a term length—anywhere from one month to ten years. Typically, the longer the term, the higher the interest rate. You make a one-time deposit, and the money earns interest until the maturity date. Some banks compound interest daily, others monthly or quarterly.
Once your CD matures, you can withdraw the money, renew it for a new term, or move it into another account. If you don’t act, most banks will automatically roll it into a new CD with the same term. But withdrawing early usually comes with a penalty, which is often three to six months of interest.
CDs work best for money you won’t need right away. If you’re saving for something in the next couple of years and want a guaranteed return, they’re a simple way to earn more than a standard savings account—without taking on any risk.
Key Features of a Certificate of Deposit
Before opening a CD, it’s important to understand how they work and what you’re agreeing to. Here are the key features that set CDs apart from other savings options.
Interest rates (APY)
CDs typically offer higher annual percentage yields (APYs) than regular savings accounts. The APY is fixed when you open the account, so you’ll know exactly how much you’ll earn—regardless of future rate changes.
Term lengths
CD terms can range from one month to ten years. Short-term CDs usually offer lower rates, while long-term CDs pay more but keep your money locked up longer.
Minimum deposit requirements
Most banks require a minimum deposit, often starting at $500 or $1,000. Some may require more, while a few online banks offer CDs with no minimum at all.
Early withdrawal penalties
Taking your money out before the CD matures usually triggers a penalty. This is often equal to several months of earned interest and can wipe out your returns. Always check the fine print before you commit.
FDIC or NCUA insurance
CDs are protected by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), depending on where you bank. Your deposits are insured up to $250,000 per depositor, per institution.
Automatic renewals
Most CDs automatically renew when they mature, unless you withdraw the money or move it into another account. You typically have a short grace period—around 7 to 10 days—to make changes without a penalty.
Types of CDs
Not all certificates of deposit work the same way. While the standard CD is the most common, there are several other types that offer more flexibility—or more risk—depending on your savings goals.
Traditional CD
This is the most straightforward option. You deposit a fixed amount, lock it in for a set term, and earn a guaranteed interest rate. It’s simple, predictable, and usually offers better returns than a regular savings account.
No-Penalty CD
This CD lets you withdraw your money before the maturity date without paying a penalty. In exchange for that flexibility, you’ll usually get a lower interest rate. Term options may also be limited.
Bump-Up CD
A bump-up CD allows you to raise your rate once during the term if interest rates go up. It’s useful in a rising rate environment, but the starting rate is usually lower than what you’d get with a traditional CD.
Step-Up CD
With a step-up CD, your rate increases automatically at set intervals during the term. The schedule is fixed, so you know when the rate changes—and by how much. You may need a larger deposit to qualify.
Callable CD
A callable CD pays a higher interest rate but gives the bank the right to close the account early, usually after a set period. If rates fall, the bank may “call” the CD and return your money before maturity.
Jumbo CD
Jumbo CDs require a large minimum deposit—usually $100,000 or more. In return, they may offer a slightly higher APY than standard CDs, but the difference is often small.
Variable-Rate CD
With a variable-rate CD, your interest rate can go up or down over time based on a benchmark, like the prime rate or Treasury yields. These are riskier than fixed-rate CDs but may pay more if rates rise.
Market-Linked CD
Market-linked CDs tie your return to a stock index or other market indicator. If the market performs well, your return could beat a traditional CD. If not, your gains may be limited—or nonexistent. Principal is usually protected, but returns are not guaranteed.
Each CD type has trade-offs. The right choice depends on how long you can leave your money untouched and how much rate flexibility you’re comfortable with.
Pros & Cons of a Certificate of Deposit
Before opening a CD, consider the benefits and limitations to decide if it fits your savings plan.
Pros
- Guaranteed return: Your rate is locked in, so your earnings are predictable.
- Safe and insured: CDs are backed by the FDIC or NCUA up to $250,000.
- Higher interest than savings accounts: Especially with longer terms or promotional rates.
Cons
- Early withdrawal penalties: Taking out money early can cost you months of interest.
- Limited flexibility: Your funds are locked in until the CD matures.
- May not beat inflation: Long-term CDs might underperform if inflation rises.
How CD Laddering Works
CD laddering is a savings strategy that helps you earn higher interest without locking up all your money long-term. Instead of putting all your cash into one CD, you split it across multiple CDs with different maturity dates.
Here’s how it works:
Let’s say you have $5,000 to invest. You could put $1,000 into five CDs with terms of one, two, three, four, and five years. When the first CD matures, you can either withdraw the funds or reinvest them into a new five-year CD. Over time, you’ll have one CD maturing each year—giving you regular access to cash while keeping most of your savings in higher-yield long-term CDs.
Laddering is especially useful if you want to take advantage of higher interest rates without sacrificing liquidity. It also helps protect you against rate drops by locking in multiple rates at different times.
Who should open a CD?
A CD is a smart choice if you have extra cash that you won’t need for a while and want a safe way to grow it. It works well for short- to mid-term savings goals, like a home down payment, a future tuition bill, or a major purchase where timing is predictable.
Before locking your money into a CD, though, it’s worth comparing rates on high-yield savings accounts and money market accounts. These options may offer similar returns with more flexibility—especially if you’re not 100% sure you can leave the money untouched until the CD matures.
If you already have a solid emergency fund in place and want to earn more interest without taking on risk, a CD can be a solid addition to your savings plan.
How to Open a CD
You can get a CD at just about any bank or credit union. When looking at a credit union, they might refer to them as share certificates. In addition to brick and mortar banks near you, you can also look at online banks to determine the best APY.
It’s also wise to shop around to find the best rate for the term length you’re looking for. The end of a CD term is called its “maturity date,” so keep an eye out for that number when comparing CD accounts.
It’s also worth checking banks and credit unions for a bonus CD rate. Your existing bank may offer a good deal, or you could take advantage of a new customer bonus at a new bank or credit union. When considering any financial product or service, always do your homework before making a decision.
Final Thoughts
A certificate of deposit offers a safe way to earn more interest than a traditional savings account—as long as you’re comfortable leaving your money untouched for a while. With interest rates rising again, CDs are becoming more competitive and worth considering for short- and mid-term savings goals.
Just make sure your emergency fund is covered first, compare rates across banks and credit unions, and consider strategies like laddering if you want more flexibility. When used the right way, a CD can help you grow your savings without stress.
