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If you want a guaranteed return on your savings, then opening a certificate of deposit may be a logical choice: CDs are a low-risk place to park cash that come with a fixed interest rate. These time-deposit products offered by banks and credit unions tend to pay more interest than savings accounts because they are less liquid.
Here’s a closer look at how to open a CD.
1. Choose the right CD
The biggest upside of a certificate of deposit is that your money will grow steadily at a guaranteed rate. In exchange for that guaranteed rate, you must commit to leaving the funds in the account for a specified term.
Before you open a CD, make sure that you have a goal in mind for these funds. Are you planning to buy a car within the next few years or do you want to fund a vacation in a year? With a determined goal in mind, you’ll be able to pick an appropriate CD term — one that matures when you expect to fulfill that goal.
Lengths of term
The most common CD terms tend to range from three months to five years. With many CDs, you will not have access to the funds until the CD matures without incurring an early withdrawal penalty, which could wipe out any interest earned and potentially some of your principal. Hence, it’s important to choose a CD with a term that you know you can afford to put the money away for.
Types of CDs
There are a dozen types of CDs to choose from. Here are some of the more common types, which offer different levels of flexibility.
Traditional CDs typically pay higher interest rates — especially for longer terms — but lock funds in for a specified period. Most traditional CDs will not allow you to add additional money after the initial deposit and will penalize you for early withdrawals.
An add-on CD allows savers to make several deposits over the course of the term. The amount that can be added to the CD may be limited, depending on the CD’s terms.
You can avoid costly penalties by choosing to open a no-penalty CD, sometimes called a liquid CD, that offers no penalty fees for withdrawing funds early, though interest rates may not be as favorable as with a traditional CD. A high-yield savings account or money market account may be a better option if having access to the funds is critical.
Bump-up CDs are a good option in a rising rate environment, allowing you to take advantage of a higher rate for the duration of the CD term. Typically, one bump up is allowed per term, but terms vary depending on the length of the CD’s duration. Bump-up CDs frequently pay less interest than traditional CDs and may still be subject to penalties for early withdrawal.
2. Find the best rate
Finding the perfect CD to stash your savings requires research. Although you can do that chore quickly with Bankrate’s help, another way to narrow the search is to determine if you want to shop in person or online.
Online vs. brick-and-mortar
An online bank, or direct bank, is a good option for finding the highest annual percentage yield (APY). With lower overhead expenses than brick-and-mortar banks, online banks tend to offer more favorable APYs. Plus, many online banks also offer low fees.
Whichever direction you take, ensure that the institution you are working with is backed by the Federal Deposit Insurance Corp. (FDIC), which insures deposits up to $250,000 per customer, per bank. If the bank fails, you will get your money back within the insurance guidelines.
3. Determine when to have interest disbursed
Financial institutions may give you two disbursement options: Leave the interest in the CD until it matures to let it continue to compound; or you can request a regular interest-only payout to spend as you wish.
Disbursements depend on the financial institution’s rules. If you choose to receive the interest earned before the CD’s maturity, you may have the option to receive a check or direct deposit monthly, quarterly or annually.
4. Create your account
As with all financial products, documentation is needed to open a CD, so that the financial institution can verify your identity. Before starting the application process, gather the required information ahead of time to avoid scrambling for paperwork.
Here is the information typically needed to open any bank account:
- Your Social Security number (or individual taxpayer identification number).
- A valid ID, such as a driver’s license.
- The date of birth of all account holders, if you are opening a joint account.
- A physical U.S. address.
- A phone number.
- An email address.
- An opening deposit amount (and the funding account information).
5. Fund the CD
Opening a CD often requires having money on hand to deposit into the new account. Although some banks require no minimum deposit to open a CD, others require a minimum deposit.
Here are a few examples:
- Synchrony offers a variety of CD terms — from three months to five years — that require no minimum deposit.
- Bank of America offers standard CDs that require a $1,000 minimum deposit, but it also offers Featured CDs that require a $10,000 minimum deposit.
- LendingClub’s CDs, which range from one to five years, require a minimum of $2,500 to open.
With so many options, you can find a CD with an opening deposit requirement that works well for your situation. In general, expect to have at least $1,000 on hand to open a CD with a competitive rate.
Before deciding to open a CD, be sure to compare products. The money you are putting into a CD will grow at a guaranteed rate, so it pays to shop for the best rate and terms that fit within your savings timeline.
— Bankrate’s René Bennett contributed to an update of this article.