Images by Getty Images; Illustration by Issiah Davis/Bankrate
Key takeaways
- A certificate of deposit (CD) is a savings account that locks your money for a fixed term in exchange for a guaranteed interest rate.
- CD terms typically range from 3 months to 5 years, with longer terms generally offering higher rates.
- Current CD rates reach up to 4.50% APY at top banks.
- Early withdrawal penalties typically equal 3-12 months of interest, making CDs best for money you won’t need before maturity.
A certificate of deposit (CD) is a type of savings account that earns a fixed interest rate for a predetermined period. Unlike regular savings accounts, CDs require you to leave your money untouched until the term ends — known as the maturity date — in exchange for typically higher, guaranteed returns.
CDs work as a time-based savings agreement between you and your bank. You deposit a lump sum, agree not to withdraw it for a specific period and earn a fixed rate of return that won’t change regardless of market conditions. This makes CDs ideal for short-term savings goals with specific timelines, such as saving for a house down payment in 18 months or a vacation for next year.
How CDs work
When you open a CD, you’re essentially lending money to your bank for a predetermined period. In return, the bank pays you a fixed interest rate that’s typically higher than traditional savings accounts because they can count on having your money for the full term.
- CD terms and rates: Most CDs offer terms ranging from three months to five years, with some banks offering terms as short as one month or as long as 10 years. Generally, longer terms offer higher interest rates as compensation for locking up your money for an extended period.
- Fixed vs. variable rates: Traditional CDs offer fixed rates, meaning your APY remains constant throughout the term. This predictability allows you to calculate exactly how much interest you’ll earn using Bankrate’s CD calculator.
- Early withdrawal penalty: Most CDs charge penalties if you withdraw funds before maturity. These penalties typically equal 90 to 365 days of interest, depending on the CD term length. For example, a one-year CD might have a 180-day interest penalty, while a five-year CD could impose a full year’s worth of interest as a penalty.
- Minimum opening deposit: Some banks don’t require any minimum deposit when you open your CD, while others may require amounts such as $500, $2,500 or more.
When CDs make financial sense
“I recommend CDs when you have a specific financial goal with a clear timeline and want to eliminate the temptation to spend that money elsewhere. For instance, if you’re saving $10,000 for a wedding in exactly two years, a CD can lock in today’s rates while making sure the money remains untouched until you need it.” — Hanna Horvath, CFP & Bankrate Banking Editor
Current CD rates and market conditions
Currently, the best CD rates range up to 4.50% APY, significantly higher than traditional savings account rates. These competitive rates reflect the current interest rate environment, where banks are willing to pay premium rates for depositor funds.
Today’s top CD rates by term:
Online banks and credit unions typically offer the highest CD rates, often 3-4 times higher than large national banks. This is because online institutions have lower overhead costs and can pass those savings to customers through higher yields.
Compare current CD rates from top banks to find the best options for your savings timeline.
Types of CDs
While traditional CDs dominate the market, several specialized CD types offer additional features for specific needs.
- No-penalty CDs
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No-penalty CDs allow early withdrawals without fees, though they typically offer slightly lower rates than traditional CDs. These work well if you want CD-level returns but need potential access to your funds.
- Bump-up CDs
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Bump-up CDs let you increase your rate once during the term if the bank raises rates. This feature provides some protection against rising rate environments, though initial rates may be lower than traditional CDs.
- Step-up CDs
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Step-up CDs automatically increase your rate at predetermined intervals, offering predictable rate increases without requiring action on your part.
- IRA CDs
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IRA CDs combine the safety of CDs with retirement account tax advantages, making them best for investors approaching retirement.
Explore all the different types of CDs to find the option that best matches your savings goals and risk tolerance.
Who should consider CDs?
CDs work best for savers with specific financial goals and clear timelines. They’re particularly suitable if you have money that won’t be needed for emergencies or daily expenses and want guaranteed returns without market risk. For example:
- People saving for major purchases with known dates (home down payments, cars, weddings)
- Conservative investors who want fixed, guaranteed returns
- Those who want to avoid spending temptation by locking funds away
- Savers looking to diversify beyond traditional savings accounts
When CDs might not be right: CDs aren’t suitable for emergency funds, which may require immediate accessibility. They’re also not ideal if you’re comfortable with market risk and seeking potentially higher returns through investments.
CDs vs. savings accounts: Key differences
While both CDs and savings accounts help you grow money safely, they serve different purposes in your financial strategy.
| Category | CDs | High-Yield Savings Accounts |
|---|---|---|
| Accessibility | Restrict access until maturity, making them better for targeted savings goals. | Provide unlimited access to funds, making them ideal for emergency funds and short-term needs. |
| Interest Rates | Typically higher because banks can rely on your money for the full term. | May offer competitive rates (especially from online banks) with more flexibility. |
| Rate Stability | Fixed rates throughout the term, ensuring predictable returns. | Variable rates that can increase or decrease based on market conditions. |
| Growth Potential | Require a lump-sum deposit upfront; no ability to add funds during the term. | Allow continuous contributions, so balances can grow over time. |
How much money do you need to open a CD?
Minimum deposit requirements vary significantly among financial institutions. Some online banks, like Ally and Synchrony, have no minimum opening deposit requirement.
Meanwhile other online banks, also offering highly competitive rates, require a much bigger upfront deposit. For example, LendingClub requires $2,500 to open a CD and Popular Direct requires $10,000. No matter how much you decide to lock into a CD, it’s vital to devote only money you don’t need for living expenses or emergencies prior.
CD laddering strategy for maximum flexibility
How CD laddering works: Instead of putting all your money in one CD, you divide it among CDs with staggered maturity dates. For example, with $5,000, you might open five $1,000 CDs maturing in 1, 2, 3, 4, and 5 years respectively.
Benefits of laddering: This approach provides annual access to funds while potentially earning higher rates from longer-term CDs. When each CD matures, you can either withdraw the money or reinvest in a new long-term CD.
Are CDs safe?
CDs from FDIC-insured banks receive the same deposit protection as other bank accounts, covering up to $250,000 per depositor, per ownership category, per insured bank. Credit union CDs receive equivalent protection through NCUSIF insurance with the same coverage limits.
This insurance protection makes CDs virtually risk-free investments, as your principal and accrued interest are protected even if the financial institution fails. However, you’ll still face early withdrawal penalties if you access funds before maturity, and inflation can erode your purchasing power over time.
What happens when a CD matures?
When your CD reaches its maturity date, you enter a grace period — typically 5-10 days — during which you can withdraw funds or reinvest without penalties. Most banks will automatically renew your CD for the same term at current rates if you don’t take action during this window.
Mark your calendar with CD maturity dates and plan your next steps in advance. Renewed CDs may offer lower rates than when you originally invested, so comparing current CD rates before renewal helps make sure you’re still getting competitive returns.
Bottom line
Certificates of deposit offer guaranteed returns and principal protection, making them valuable tools for savers with specific financial goals. They work best when you can commit to leaving money untouched for the full term and are looking for predictable returns.
The current high-rate environment makes CDs particularly attractive, allowing you to lock in competitive returns for months or years. However, they’re not suitable for emergency funds or money you might need unexpectedly.
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