A certificate of deposit is a savings account where you lock up your money for a set time in exchange for a may provide interest rate
When you open a CD, you give the bank a lump sum—say $5,000—and agree not to touch it for a specific period: three months, six months, one year, five years, or longer. In return, the bank pays you a fixed interest rate that is usually higher than what a regular savings account offers. At the end of the term, you get your original money back plus the interest earned. The trade-off is simple: you lose access to your cash during the term, and the bank knows exactly how long it can use your money.
CDs are FDIC insured up to $250,000 per depositor per bank, which means your money is protected even if the bank fails. This makes them one of the safest places to put money you do not plan to spend soon. The interest rate is locked in from day one—it will not go up or down, no matter what happens to market rates or the economy.
Key Takeaways
- You deposit a fixed amount and agree not to withdraw it until the CD matures; in return, you receive a may provide interest rate higher than most savings accounts.
- Interest rates on CDs vary by bank, term length, and deposit amount, so comparing offers across banks can significantly increase your earnings.
- Withdrawing money before the maturity date triggers an early withdrawal penalty, which is typically a loss of some or all of the interest you earned.
- CDs are FDIC insured up to $250,000, making them a low-risk way to save money you will not need for several months or years.
- When your CD matures, you can withdraw the money, open a new CD, or let it roll over into another term at the bank's current rate.
How interest rates and terms work on CDs
The interest rate you receive depends on three main factors: the bank offering the CD, the length of the term, and how much you deposit. Larger deposits sometimes earn slightly higher rates, though this varies by institution. Term length matters most: a one-year CD typically pays more than a three-month CD at the same bank, because the bank gets to hold your money longer.
Banks publish their CD rates publicly, and rates change frequently—sometimes weekly. If you lock in a rate today, that rate stays the same for the entire term, even if the bank raises or lowers its rates next month. This is why timing matters: if you expect interest rates to fall, locking in a rate now protects you. If rates are rising, you might wait or choose a shorter term so you can reinvest at a higher rate sooner.
Interest compounds on most CDs, meaning you earn interest on your interest. How often it compounds—daily, monthly, or at maturity—affects your final payout. A CD that compounds daily will earn slightly more than one that compounds monthly, all else equal.
What happens when your CD reaches maturity
When the term ends, your CD matures. The bank will notify you before this happens, usually 7 to 10 days in advance. At that point, you have three choices: withdraw the money, open a new CD at the bank's current rate, or let the CD automatically roll over into a new term at the prevailing rate.
If you do nothing, most banks will roll your CD into a new term of the same length at whatever rate they are currently offering. This happens automatically, so if you want your money out, you must act before the maturity date or during the grace period the bank provides (usually a few days after maturity). If you miss the window, you are locked in again for another full term.
Some banks offer no-penalty CDs, which let you withdraw your money early without losing interest. These rates are typically lower than standard CDs because the bank is taking on more risk. They are useful if you want the higher rate of a CD but are not certain you can leave the money untouched.
Early withdrawal penalties and when they apply
If you need your money before the CD matures, you can withdraw it—but the bank will charge an early withdrawal penalty. This penalty is usually expressed as a number of months of interest. For example, a penalty of three months of interest means the bank subtracts three months' worth of earnings from your payout. On a small CD or a short-term one, this might mean you lose all the interest you earned and get back only your original deposit.
The penalty amount varies by bank and by CD term. Longer-term CDs typically have larger penalties, because the bank loses more by having you withdraw early. A six-month CD might have a one-month penalty, while a five-year CD might have a six-month or one-year penalty. Always read the terms before you open a CD so you know what the penalty is.
The penalty applies only if you withdraw before maturity. Once the CD matures, you can withdraw without penalty. If you think there is any chance you will need the money, factor the penalty into your decision—sometimes a shorter-term CD or a regular savings account makes more sense than locking money away in a long-term CD.
Comparing CD rates across banks
CD rates vary significantly between banks. A large national bank might offer 4.00% on a one-year CD, while an online bank offers 4.75% for the same term. Over a year, that 0.75% difference adds up: on a $10,000 CD, it means $75 more in your pocket. Shopping around takes 15 minutes and can be worth hundreds of dollars on larger deposits.
Online banks and credit unions often offer higher rates than brick-and-mortar banks because they have lower overhead costs. However, make sure any bank you choose is FDIC insured (or NCUA insured if it is a credit union). You can verify this on the FDIC or NCUA website. Never open a CD at an institution that is not federally insured, no matter how high the rate looks.
When comparing, look at the annual percentage yield (APY), not just the interest rate. APY accounts for compounding and shows you the true return you will earn. Two banks might quote different rates, but the APY tells you which one actually pays more.
CDs versus other savings options
A CD pays more than a regular savings account but less than you might earn from stocks or bonds. It is a middle ground: safer than the stock market, but with lower returns. A high-yield savings account offers nearly the same rate as a CD but lets you withdraw money anytime without penalty, though the rate can change. If you might need the money within a year, a high-yield savings account is often smarter than a CD.
Money market accounts are another option. They typically pay rates between regular savings and CDs, and they give you limited check-writing or debit card access. Like savings accounts, the rate can change, but you have more flexibility than with a CD.
If you have money you will not touch for several years, a CD locks in a rate and removes the temptation to spend it. If you are uncertain about when you will need the money, a high-yield savings account gives you the rate without the lock-in cost.
How to open a CD and what to bring
Opening a CD is straightforward. You can do it online, by phone, or in person at a bank branch. You will need a valid ID, your Social Security number, and proof of address (a utility bill or bank statement works). Have your deposit amount ready—most banks have a minimum, often $500 to $2,500, though some online banks accept as little as $100.
When you open the CD, you will choose the term length and confirm the rate. The bank will ask whether you want interest to compound daily, monthly, or at maturity. Daily compounding earns you slightly more. You will also confirm what happens at maturity—whether you want the CD to roll over automatically or whether you want to be contacted before that happens.
Once opened, your CD sits at the bank earning interest. You cannot add money to it or withdraw from it without triggering the early withdrawal penalty. If you want to save more, you open a separate CD or use a savings account.
Frequently Asked Questions
Can I withdraw money from a CD before it matures?
Yes, but you will pay an early withdrawal penalty. The penalty is typically a certain number of months of interest, which the bank deducts from your payout. On a small CD, this might mean you lose all the interest and get back only your original deposit. Check the penalty terms before opening the CD.
What is the difference between a CD and a savings account?
A CD locks your money for a set term and pays a higher, fixed rate. A savings account lets you withdraw anytime but pays a lower rate that can change. If you will not need the money for months or years, a CD pays more. If you might need it sooner, a savings account is more flexible.
Is my money safe in a CD?
Yes, as long as the bank is FDIC insured. Your deposit is protected up to $250,000 per bank. If the bank fails, the FDIC pays you back. You can verify FDIC insurance on the FDIC website before opening a CD.
What happens if I do not withdraw my money when the CD matures?
Most banks automatically roll your CD into a new term at the current rate if you do nothing. This means your money stays locked up for another full term. To avoid this, withdraw your money or open a new CD during the grace period the bank provides, usually a few days after maturity.
Do I pay taxes on CD interest?
Yes. CD interest is taxable income. The bank will send you a 1099-INT form at the end of the year showing how much interest you earned, and you report that on your tax return. This is true even if you did not withdraw the money.