A CD is a savings account where you agree to leave money untouched for a set time in exchange for a higher interest rate
CD stands for certificate of deposit. You give a bank a lump sum of money, the bank agrees to pay you a fixed interest rate, and you promise not to withdraw that money until a specific date arrives. That date is called the maturity date. When it passes, the money is yours to take out, along with the interest the bank paid you.
The tradeoff is simple: you lock up your cash for anywhere from a few months to five years or longer, and in return the bank pays you more interest than it would on a regular savings account. A regular savings account might pay 0.01% annually; a CD might pay 4% or 5%, depending on how long you commit and what the bank offers that week.
CDs are FDIC insured at most banks, meaning if the bank fails, the federal government guarantees your money up to $250,000 per account. That makes them one of the safest places to park money you know you won't need for a while.
Key Takeaways
- A CD requires you to deposit money and leave it untouched until the maturity date; in return, the bank pays a fixed interest rate higher than a savings account.
- CD terms range from three months to five years or longer, and the longer you commit, the higher the interest rate is usually offered.
- If you withdraw money before the maturity date, you pay an early withdrawal penalty, which is typically a few months' worth of interest.
- CDs are FDIC insured up to $250,000, making them a low-risk way to earn interest on money you don't plan to spend soon.
- When a CD matures, you can withdraw the money and interest, open a new CD, or let the bank automatically renew it at the current rate.
How interest rates and terms work on CDs
Banks set CD rates based on what the Federal Reserve is doing with interest rates and how much competition exists in your area. When the Fed raises rates, CD rates tend to rise too. When the Fed cuts rates, CD rates fall. This means the rate you see today may not be the rate available next month.
The term—how long you lock up your money—directly affects the rate. A three-month CD pays less than a one-year CD, which pays less than a five-year CD. The bank is willing to pay more because you're giving up access to your money for longer. Some banks also offer no-penalty CDs, which let you withdraw early without a penalty, but these pay lower rates because the bank can't count on keeping your money.
Interest on a CD is usually compounded daily or monthly, meaning the interest itself earns interest. The bank tells you the APY (annual percentage yield), which already accounts for compounding, so you can compare rates across banks fairly.
What happens if you need the money before maturity
If you withdraw money from a CD before the maturity date, you pay an early withdrawal penalty. The penalty varies by bank and by CD term. A common penalty is three to six months of interest, but some banks charge more. A few charge a percentage of the principal itself, though this is less common.
Before you open a CD, read the disclosure document to see what the penalty is. If a CD pays 5% annually and the penalty is six months of interest, you'd lose roughly 2.5% of your deposit if you withdrew early. That could wipe out your gain or even leave you with less than you started with, depending on how long you held the CD.
Some banks offer a grace period—usually seven to ten days after maturity—during which you can withdraw or move your money without penalty. After that window closes, the CD either renews automatically at the bank's current rate or you have to actively move the money.
The difference between CDs and savings accounts
A savings account has no maturity date and no penalty for withdrawal. You can take money out whenever you want. In exchange, the bank pays a much lower interest rate—often under 0.5% annually, though some online banks pay higher rates on savings accounts.
A CD locks you in but pays more. You sacrifice flexibility for a higher return. If you have money you won't need for six months or a year, a CD usually makes sense. If you might need the money sooner, a high-yield savings account is safer because you avoid the early withdrawal penalty.
Money market accounts sit somewhere in the middle: they pay more than regular savings accounts but less than CDs, and they let you withdraw money without penalty (though there may be limits on how often you can withdraw per month).
How to open a CD and what to watch for
Opening a CD is straightforward. You go to a bank or credit union, choose a term and amount, and hand over the money. Most banks now let you open CDs online. You'll need to provide your Social Security number and basic identification, just like opening any bank account.
Before you commit, compare rates across banks. A 5% CD at one bank and a 4.5% CD at another might not sound like much difference, but over a year on $10,000, that's $50 more in your pocket. Websites that track CD rates can show you what banks are offering that day.
Watch for banks that offer CD ladders—a strategy where you open multiple CDs with different maturity dates so that money comes due at regular intervals. This lets you access some cash without penalty while keeping the rest locked in at higher rates. It's a way to balance safety and access.
What happens when your CD matures
On the maturity date, the bank sends you a notice. You then have a few options: withdraw the money and interest, open a new CD at the current rate, or let the bank renew the CD automatically at whatever rate it's offering that day.
If you do nothing, most banks automatically renew your CD at their current rate. This can work in your favor if rates have risen, but it can hurt you if rates have fallen. Read the maturity notice carefully so you know what the new rate will be and when the renewal takes effect.
Some banks give you a grace period—often seven to ten days—to make a decision without penalty. After that window, you're locked in again. If you want to move your money to a different bank or account, do it during the grace period to avoid an early withdrawal penalty.
CDs at credit unions and online banks
Credit unions offer CDs much like banks do, and they're also insured by the federal government (through the NCUA instead of the FDIC, but the protection is the same up to $250,000). Credit union CD rates sometimes beat bank rates, especially if you're a member of a large credit union.
Online banks often pay higher CD rates than brick-and-mortar banks because they have lower overhead costs. If you're comfortable managing your account online and don't need to visit a physical branch, online CDs can be a good way to earn more interest. Make sure the bank is FDIC insured before you deposit.
Frequently Asked Questions
Can I add more money to a CD after I open it?
No. A CD is a fixed deposit. Once you open it, you can't add money to it. If you want to deposit more, you'd have to open a separate CD. Some banks let you open multiple CDs at once with different amounts if you want to spread your money across several terms.
What if interest rates go up after I buy a CD?
You're locked into your rate for the term you chose. If rates rise, you won't benefit until your CD matures and you can open a new one at the higher rate. This is why some people use CD ladders—they open CDs with different maturity dates so they can reinvest at higher rates as they come due.
Is a CD a good place to keep emergency money?
CDs are not ideal for emergency funds because you can't access the money without paying a penalty. Emergency money should stay in a regular savings account or money market account where you can withdraw it instantly. Use CDs for money you know you won't need for several months or longer.
Do I have to pay taxes on CD interest?
Yes. CD interest is taxable income. The bank will send you a 1099-INT form at tax time showing how much interest you earned. You report this on your tax return. This is true even if you didn't withdraw the money yet—you owe tax on the interest in the year it was earned.
What's the difference between a CD and a bond?
Both lock up your money for a set time and pay interest, but bonds are issued by governments or companies, not banks, and they're traded on markets. CD rates are set by the bank and don't change. Bond prices fluctuate, so you could lose money if you sell before maturity. CDs are simpler and safer for most people.