A CD is a savings account where you agree to leave your money untouched for a set time in exchange for a higher interest rate

A certificate of deposit, or CD, is a contract between you and a bank. You give the bank a sum of money — anywhere from $500 to $100,000 or more, depending on the bank — and promise not to touch it for a fixed period. That period might be three months, six months, one year, or five years. In return, the bank pays you a higher interest rate than it would on a regular savings account.

The reason banks offer this deal is straightforward: they know exactly how long they can lend your money to other customers. A regular savings account could be emptied tomorrow. A CD that locks your money away for two years lets them plan ahead. You benefit because that certainty is worth money to them — they pass some of it to you as interest.

When your CD reaches its maturity date — the day the contract ends — you get your original money back plus all the interest it earned. At that point you can withdraw it, open a new CD, or move it somewhere else.

Key Takeaways

  • A CD pays a fixed interest rate for a fixed time period, and you cannot withdraw the money early without paying a penalty.
  • Interest rates on CDs are usually higher than savings accounts because the bank knows your money will stay put.
  • When the CD matures, you receive your original deposit plus all earned interest, and you can then decide what to do with the money.
  • CDs are FDIC-insured up to $250,000 per account, so your money is protected even if the bank fails.
  • Shorter CDs (three to six months) have lower rates; longer ones (two to five years) typically pay more interest.

How much interest you earn depends on the rate and the length of time

The interest rate a bank offers on a CD varies. It depends on what the broader economy is doing, what the Federal Reserve is doing with interest rates, and what that particular bank needs. When the Federal Reserve raises rates, CD rates tend to rise. When it lowers them, CD rates fall. You will see different rates at different banks on the same day.

The length of the CD also matters. A three-month CD will pay less interest than a two-year CD at the same bank, because you are locking your money away for longer. The bank can lend it out for longer and make more money, so they share more with you.

To see what you will actually earn, look for the annual percentage yield, or APY. This is the real return you get in a year, accounting for how often the bank compounds your interest (adds earned interest back into the account so it earns interest too). A bank might advertise a 4.5% APY on a one-year CD. If you put in $10,000, after one year you would have $10,450.

What happens if you need the money before the CD matures

This is the main catch. If you withdraw money from a CD before the maturity date, the bank charges you an early withdrawal penalty. The penalty varies by bank and by the length of the CD. It might be three months of interest, six months of interest, or a flat fee. Some banks charge more for longer CDs.

Before you open a CD, find out what the penalty is. If you think there is any chance you will need the money, a regular savings account might be safer, even though it pays less interest. A CD is best for money you know you will not touch.

Some banks offer no-penalty CDs, which let you withdraw early without a fee — but they pay lower interest rates to make up for that flexibility. These are a middle ground if you want slightly better returns than savings but need some access to your cash.

CDs are insured and backed by the federal government

Your money in a CD is protected by the Federal Deposit Insurance Corporation, or FDIC. This is a government agency that insures bank deposits. If your bank fails, the FDIC will pay you back up to $250,000 per account. This protection applies to CDs the same way it applies to checking and savings accounts.

The $250,000 limit is per depositor, per bank, per account type. If you have a CD and a savings account at the same bank, they are counted separately for insurance purposes. If you have $200,000 in a CD and $100,000 in a savings account at the same bank, both are fully covered. If you have $300,000 in a CD at one bank, only $250,000 is insured.

This insurance is automatic — you do not have to do anything to get it. As long as you open your CD at an FDIC-insured bank, your money is protected.

Where to find CDs and how to compare them

You can open a CD at any bank or credit union. Large national banks offer them, but they often pay lower rates. Online banks and credit unions frequently pay higher rates because they have lower overhead costs. The tradeoff is that you cannot walk into a branch — everything happens by phone, email, or website.

To compare CDs, look at three things: the APY (the interest rate), the term (how long the money is locked away), and the early withdrawal penalty. A website like Bankrate or DepositAccounts shows current rates at many banks side by side. You can see what different institutions are offering on three-month, six-month, one-year, and longer CDs.

When you find a CD you want, you will need to provide your name, address, Social Security number, and proof of identity. You will also need to fund the account — usually by transferring money from a checking or savings account at another bank, or by mailing a check. Most banks let you open a CD online in 10 to 15 minutes.

CD ladders: a way to balance interest and access

Some people use a strategy called CD laddering to get better rates while still having regular access to their money. Here is how it works: instead of putting all your money into one CD that matures in five years, you split it into five CDs that mature in one, two, three, four, and five years.

Every year, one CD matures. You can withdraw that money if you need it, or you can open a new five-year CD to replace it. This way you always have some money becoming available, but most of your money is in longer-term CDs earning higher rates. It takes more effort to manage, but it gives you both better returns and some flexibility.

Laddering works best if you have a larger amount to invest — at least $5,000 or $10,000 — and if you are comfortable opening multiple accounts.

How CDs fit into a savings plan

A CD is not a place for money you might need in an emergency. Keep three to six months of living expenses in a regular savings account that you can access when ready. A CD is for money you have already saved beyond that emergency fund — money you know you will not need for a specific period.

CDs work well for goals with a timeline. If you know you want to buy a car in two years, a two-year CD locks in a rate and keeps you from spending the money. If you are saving for a down payment on a house in five years, a five-year CD does the same thing. The interest you earn is a bonus on top of your savings.

CDs also make sense when interest rates are high. If rates are at 5% or higher, locking in that rate for a year or two protects you if rates fall later. If rates are very low, you might wait or stick with a shorter CD so you can move to a better rate sooner.

Frequently Asked Questions

Can I move my CD to a different bank before it matures?

You can transfer the CD itself to another bank, but most banks will not accept a transfer — they want you to withdraw it and open a new one with them. Withdrawing triggers the early withdrawal penalty. Your best option is to let it mature, then open a new CD elsewhere. Some banks waive the penalty if you are moving to them, so it is worth asking.

What happens when my CD matures?

The bank will notify you before the maturity date. You then have a grace period — usually 7 to 10 days — to decide what to do. You can withdraw the money, open a new CD at the same bank, or move it elsewhere. If you do nothing, many banks automatically renew the CD at the current rate.

Is a CD better than a savings account?

A CD pays more interest, but your money is locked away. A savings account pays less but lets you withdraw anytime. Use a savings account for money you might need soon, and a CD for money you are certain you will not touch for several months or longer.

Can I open a CD if I have bad credit?

Yes. Banks do not check your credit to open a CD. They only check your identity and whether you have had problems with banks in the past (through a system called ChexSystems). A CD is based on your ability to leave money untouched, not on your credit history.

What if interest rates go up after I open my CD?

You are locked into the rate you agreed to when you opened it. If rates rise, you will earn less than you could with a new CD. This is the risk of locking in a rate. If rates fall, you benefit because you locked in the higher rate. This is why some people use laddering — it lets you open new CDs at better rates as old ones mature.