What a CD rate is and why it matters

A CD rate is the percentage of interest a bank pays you for letting them hold your money in a certificate of deposit for a set period of time. When you open a CD, you agree to leave your money untouched until a specific date — called the maturity date — and in return, the bank guarantees you a fixed interest rate for the entire time you hold it.

The rate matters because it determines how much extra money you'll have when your CD matures. A CD paying 4.5% annually will earn you more than one paying 2%, even if you deposit the same amount. Unlike a regular savings account, where the interest rate can change whenever the bank decides, a CD rate stays the same from the day you open it until it matures.

CD rates are one of the few places in banking where you can lock in a may provide return. You know exactly how much you'll earn before you hand over your money, which makes planning easier.

Key Takeaways

  • CD rates are fixed percentages that banks promise to pay you for the entire time your money is locked in the CD.
  • Longer CD terms (like 5 years) usually pay higher rates than shorter ones (like 3 months), because the bank keeps your money longer.
  • CD rates change based on what the Federal Reserve does with interest rates, so the best rates available today may be different next month.
  • You can compare CD rates across different banks to find the highest one, and rates vary significantly — sometimes by a full percentage point or more.
  • Breaking a CD early usually costs you some or all of the interest you earned, so only lock money away that you won't need before maturity.

How CD rates are set and why they change

Banks set their CD rates based on what the Federal Reserve — the central banking system of the United States — does with its benchmark interest rate. When the Federal Reserve raises rates, banks typically raise the rates they offer on CDs. When the Federal Reserve lowers rates, CD rates usually fall too. This happens because banks borrow money at rates set by the Federal Reserve, and they pass those costs (or savings) along to you.

The second factor is competition. If one bank offers 4.8% on a one-year CD and another offers 4.2%, savers will move their money to the higher rate. Banks know this, so they adjust their rates to stay competitive. Online banks often offer higher CD rates than brick-and-mortar banks because they have lower overhead costs.

CD rates also change based on how long you agree to lock your money away. This is called the term. A three-month CD will almost always pay less than a five-year CD, because the bank can't use your money for as long.

The relationship between CD terms and rates

In most economic conditions, longer CD terms pay higher rates than shorter ones. A bank might offer 4.0% on a three-month CD but 5.0% on a two-year CD. The longer you're willing to wait, the more the bank pays you. This is because the bank wants to lock in your money for as long as possible, and it's willing to pay more to do that.

However, this relationship can flip during unusual economic times. Sometimes short-term rates are higher than long-term rates — this is called an inverted yield curve. When this happens, a six-month CD might pay more than a two-year CD. This is rare, but it does occur.

The key point: before you open a CD, compare rates across different terms. Don't assume that the longest term always pays the most. Look at what's actually available right now.

How to find and compare CD rates

CD rates vary widely between banks. The same $10,000 deposit might earn $400 in one year at one bank and $600 at another, depending on the rate. To find the best rate, you need to compare.

Start by checking your own bank, but don't stop there. Online banks, credit unions, and banks in other states all offer CDs, and you can open them from anywhere. Websites that list CD rates from multiple banks — such as Bankrate, DepositAccounts, or your bank's own website — let you see many options at once. When you compare, make sure you're looking at the same term (three months, one year, five years, etc.) so the comparison is fair.

Pay attention to the annual percentage yield, or APY. This is the rate expressed as a yearly number, and it's what you should use to compare. Also check whether the bank is insured by the FDIC (Federal Deposit Insurance Corporation) or the NCUA (National Credit Union Administration). This insurance protects your money up to $250,000 if the bank fails.

What happens to your rate when the CD matures

When your CD reaches its maturity date, the bank will notify you. At that point, you have choices: you can withdraw the money and the interest you earned, you can open a new CD at whatever rate the bank is offering that day, or you can move your money to a different bank.

The rate you locked in does not carry over to a new CD. If you opened a CD at 5.0% and rates have dropped to 3.5% by the time it matures, your new CD will be at 3.5% — unless you shop around and find a bank offering something higher. This is why it's worth paying attention to what rates are available as your maturity date approaches.

Some banks have an auto-renewal feature that automatically opens a new CD at the current rate if you don't tell them what to do. Read your CD agreement to see if your bank does this, because you might not want to renew at a lower rate.

The cost of withdrawing money early

One of the main reasons CD rates are higher than savings account rates is that you promise to leave your money alone. If you break that promise and withdraw before the maturity date, the bank charges you a penalty. This penalty is usually a certain number of months of interest.

For example, a bank might charge a three-month interest penalty. If you opened a one-year CD earning $500 in interest, and you withdrew after six months, you'd lose three months of that interest — so you'd get back your original deposit plus only $250 in interest. In some cases, the penalty can be large enough that you actually lose money from your original deposit.

Before you open a CD, ask the bank what the early withdrawal penalty is. Make sure you won't need the money before the maturity date. If there's any chance you'll need it, a regular savings account might be safer, even if the rate is lower.

How CD rates compare to other savings options

CD rates are usually higher than savings account rates because you're giving up access to your money. A high-yield savings account might pay 4.0%, while a one-year CD at the same bank might pay 4.5%. That extra 0.5% is the bank's way of rewarding you for locking your money away.

Money market accounts sometimes pay rates close to CDs, but they usually let you withdraw money without a penalty. This flexibility costs you — the rate is typically lower than a comparable CD.

Treasury bills — short-term loans to the federal government — sometimes pay rates similar to or higher than CDs, and they're backed by the U.S. government. However, they work differently and require a different process to open.

The right choice depends on whether you need access to your money. If you have money you won't touch for a year or more, a CD usually pays more. If you might need the money sooner, a savings account is safer.

Frequently Asked Questions

Do CD rates change after I open the CD?

No. Once you open a CD, your rate is locked in for the entire term. Even if the bank raises or lowers its rates the next day, your rate stays the same. This is the main advantage of a CD — you know exactly what you'll earn.

Why do online banks offer higher CD rates than local banks?

Online banks have lower costs because they don't operate physical branches. They pass those savings along by offering higher rates on CDs and savings accounts. The tradeoff is that you can't walk into a branch to handle problems in person.

Can I open a CD with a very small amount of money?

Most banks require a minimum deposit to open a CD, often $500 to $2,500, though some online banks have lower minimums or none at all. Check with the specific bank before you assume you can't open one.

What's the difference between APY and APR on a CD?

APY (annual percentage yield) includes the effect of compounding — interest earned on interest. APR (annual percentage rate) does not. For CDs, always look at the APY, because that's the actual amount you'll earn in a year.

If rates go up after I open my CD, can I get the higher rate?

Not without closing the CD and opening a new one, which triggers the early withdrawal penalty. This is a real risk of locking in a rate — if rates rise significantly, you'll wish you had waited. Some banks offer "CD ladders" (multiple CDs maturing at different times) to reduce this risk.