A CD is a savings account where you lock up your money for a set time in exchange for a higher interest rate

A certificate of deposit (CD) is an agreement between you and a bank. You give the bank a lump sum of money—say $5,000—and promise not to touch it for a specific period: three months, six months, one year, five years, or longer. In return, the bank pays you interest at a rate higher than a regular savings account. When the time is up, you get your original money back plus the interest earned.

The bank uses your money during that locked period to make loans and investments. That is why they pay you more than they would for money you could withdraw anytime. You are essentially lending the bank your cash, and they compensate you for that commitment.

CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account at each bank. This means if the bank fails, your money is protected up to that limit. This protection applies whether you have $1,000 or $250,000 in the CD.

Key Takeaways

  • You deposit money into a CD for a fixed term—anywhere from three months to five years or more—and cannot withdraw it without penalty until that term ends.
  • The interest rate on a CD is locked in when you open the account, so you know exactly how much you will earn regardless of whether rates rise or fall.
  • Breaking a CD early usually costs you some or all of the interest you earned, and sometimes a portion of your principal, depending on the bank's penalty.
  • FDIC insurance protects your CD balance up to $250,000 per bank, so your money is safe even if the bank fails.
  • CDs pay more interest than savings accounts because the bank knows your money will stay put for the entire term.

How the interest rate and term work together

When you open a CD, the bank tells you two things: the annual percentage yield (APY) and the term length. The APY is the interest rate you will earn over one year, expressed as a percentage. A one-year CD might offer 4.5% APY, while a five-year CD might offer 5.2% APY. Longer terms usually pay higher rates because the bank gets to use your money for longer.

The interest is calculated based on your deposit amount and the APY. If you put $10,000 into a one-year CD at 4.5% APY, you will earn $450 in interest over that year (assuming simple interest; some banks compound it more frequently). At the end of the year, you receive $10,450.

The rate you lock in on day one stays the same for the entire term. If you open a three-year CD at 5% APY and interest rates drop to 2% the next month, you still earn 5%. If rates climb to 7%, you still earn 5%. This predictability is one reason people choose CDs—you know exactly what you will have at maturity.

What happens when your CD reaches maturity

When the term ends, your CD reaches maturity. The bank automatically deposits your original deposit plus all earned interest into your account. You can then withdraw the money, move it to another CD, or leave it in a regular savings account.

Most banks have a grace period—usually seven to ten days—during which you can decide what to do with the money without penalty. If you do nothing during that window, many banks will automatically roll the CD into a new CD with the same term at the current interest rate. Check your CD agreement to see your bank's rollover policy, because rates may have changed since you opened the original CD.

If you want to withdraw the money or move it elsewhere, you must act during the grace period or contact the bank to prevent an automatic rollover. Some banks allow you to withdraw just the interest and roll the principal into a new CD, giving you flexibility.

Early withdrawal penalties and what they cost

If you need your money before the CD matures, you can withdraw it—but the bank will charge you a penalty. The penalty amount varies by bank and by CD term. A common penalty is three to six months of interest, though some banks charge a percentage of your principal or a flat dollar amount.

For example, if you have a $10,000 CD earning $450 per year and you withdraw after six months, the bank might deduct three months of interest ($112.50) as a penalty. You would receive $10,225 instead of $10,450. On longer-term CDs, penalties can be steeper—sometimes a full year of interest or more.

Before you open a CD, read the disclosure document that shows the penalty amount. This matters most if you think you might need the money sooner than planned. Some banks offer no-penalty CDs that let you withdraw early without a charge, though these typically pay lower interest rates to offset that flexibility.

CD laddering: a strategy to access your money sooner

If you have a large sum to invest but worry about locking it all up for years, you can use a strategy called CD laddering. You split your money into multiple CDs with different maturity dates.

For example, with $10,000, you might buy five $2,000 CDs: one maturing in one year, one in two years, one in three years, one in four years, and one in five years. Each year, one CD matures and you can withdraw that money, reinvest it, or spend it. This way you have access to a portion of your money every year while still earning the higher rates that longer-term CDs offer.

Laddering works best when interest rates are stable or rising. If rates are falling, you lock in higher rates on the longer-term CDs. If rates are rising, the CDs maturing sooner let you reinvest at the new higher rates.

How CD rates compare to other savings options

CDs typically pay more interest than regular savings accounts or money market accounts at the same bank. A savings account might pay 0.01% to 0.5% APY, while a CD at the same bank might pay 4% to 5.5% APY, depending on the term and current market conditions.

However, CDs pay less than you might earn from stocks, bonds, or other investments over the long term. They are also less liquid—you cannot access your money without a penalty. CDs are best for money you know you will not need for a specific period and want to keep safe while earning more than a savings account.

Online banks often pay higher CD rates than brick-and-mortar banks because they have lower overhead costs. If you are considering a CD, compare rates across several banks, including online options. Rates change frequently, so what is best today may not be best next month.

Different types of CDs and special features

Most banks offer standard CDs, but some offer variations. A bump-up CD lets you request a rate increase once during the term if rates rise. A step-up CD automatically increases your rate at set intervals. A liquid CD or no-penalty CD lets you withdraw without a penalty, though the rate is usually lower.

Some banks offer jumbo CDs for deposits of $100,000 or more, which may pay slightly higher rates. Others offer promotional CDs with higher rates for a limited time to attract new customers. A few banks offer callable CDs, where the bank can end the CD early if rates fall, though you still receive your principal and earned interest.

Read the fine print on any CD you consider. The term, rate, penalty, and any special features should all be clear before you hand over your money.

Frequently Asked Questions

Can I withdraw money from a CD before it matures?

Yes, you can withdraw early, but the bank will charge a penalty. The penalty is usually three to six months of interest, though it varies by bank and CD term. Some banks offer no-penalty CDs that let you withdraw without a charge, but these pay lower interest rates. Check your CD agreement to see the exact penalty before you open the account.

What happens to my CD when it reaches maturity?

Most banks automatically roll your CD into a new CD with the same term at the current interest rate. You usually have a grace period of seven to ten days to withdraw the money or prevent the rollover. Contact your bank if you want to do something different, like withdraw the interest and reinvest the principal.

Is my money safe in a CD if the bank fails?

Yes. The FDIC insures CDs up to $250,000 per account at each bank. If the bank fails, you will receive your full balance up to that limit. If you have more than $250,000, only the first $250,000 is protected at that bank, so consider splitting larger amounts across multiple banks.

Why would I choose a CD over a savings account?

CDs pay significantly higher interest rates because you commit to leaving your money untouched for a set period. If you have money you will not need for several months or years, a CD lets you earn more than a savings account. The tradeoff is that you cannot access the money without a penalty.

Do CD rates change after I open the account?

No. The rate you lock in when you open the CD stays the same for the entire term, regardless of whether market rates rise or fall. This is why CDs are predictable—you know exactly how much interest you will earn from day one.