What’s a Certificate of Deposit (CD) and what are its benefits?

What "Certificate of Deposit" (CD) Means

A CD guarantees a certain rate of interest. Each CD has a term that can range from a few months to several years. At the end of the term, you can take out your money along with the interest earned. Like savings accounts, CDs are usually insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. 

What to Look for When Opening a CD

Compare CD Rates

While CD interest rates are somewhat higher than those of checking or money market accounts, not all CD rates are the same. Start by comparing the annual percentage yields (APYs) for any CDs you're thinking about opening. The APY tells you what percentage of your deposit you'll earn in interest over the course of a year. As long as the other details, like the minimum deposit and term, work for you, choose the CD that pays the highest rate. There are also CDs that allow you to "step up" or "bump up" to a higher rate at some point during the term.

Check the Minimum Deposit

Different CDs have different requirements about the amount of money you need to put into the account. For many CDs, the minimum is a few thousand dollars, but there are even accounts that require tens of thousands of dollars. CDs with higher minimums often pay better rates. Before you decide on a CD, make sure you're comfortable with the minimum deposit. Once money goes into a CD, it can't be easily taken out. Make sure you have enough cash in your regular checking and savings accounts to cover an emergency expense.

Check the Length of the Term

If you withdraw money from your CD before the term is up, you'll pay a fee. So choose a CD whose term is in line with your savings goals. If you're saving up for a purchase you're going to make in six months, for example, you'll want a CD with a term of a few months rather than a year or more. But if you want to keep savings in a CD far into the future, try to find a CD with a longer term – they usually pay better rates than shorter-term CDs.

With a range of savings and investment vehicles available to you, the variety of CD options and their relative safety make them well worth considering. A bank CD is a federally insured, secure savings account that has a fixed interest rate for a fixed amount of time, called a term. CDs usually don’t have monthly fees, but do impose fees if funds are accessed before the term ends on the maturity date.

Possible CD fees

Unlike savings accounts, CDs don’t allow the owner to withdraw the principal (that’s the amount of the original deposit) without triggering an early withdrawal fee. Once the term ends, your CD has reached “maturity” and that money’s yours. Until the maturity date is reached, you can usually only withdraw interest earned on the principal without a fee. 

Should I open a CD?

Because many CDs earn higher interest than other savings accounts and give you a return you can count on, they are a secure, low risk savings option. They’re a good choice when you know you can put your deposit aside and not access it until the term ends.

To take advantage of the highest interest rate, you’ll often need to lock away your deposit for a longer term. If you’re considering a shorter-term CD, you might be able to find a comparable interest rate from a traditional savings account, and keep the access to your money.