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How to open a certificate of deposit (CD)

A man opens an account online.
A man opens an account online.
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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. 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.

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 certainty, you will not have access to your funds until the end of the term.

Before you open a CD, make sure that you have a goal in mind for these funds. Yes, you want to build your savings, but why? Are you planning to buy a car within the next few years or do you want to fund a vacation in a year? The reason behind your savings can help you pick the appropriate term for your CD.

Lengths of term

Common CD terms include three, six and nine months, 1 year, 18 months, and two, three, four and five years. With most 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.

Types of CDs

There are a dozen types of CDs to choose from. Here are some of the more common types, depending on how accessible you need the funds to be.

Traditional CD

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.

Add-on CD

An add-on CD will let you make several deposits over the course of the term. But there may still be limitations to the amount that you can add to a CD depending on the fine print.

Liquid CD

You can avoid costly penalties by choosing to open a liquid CD that offers no penalty fees if you need to withdraw your 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 CD

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.

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 if you are looking for 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.

A CD offered through an online bank can be opened from the comfort of your couch, but you’ll sacrifice the personal service that a brick-and-mortar bank can provide.

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. If the bank fails, you will get your money back within the insurance guidelines.

Determine when to have interest disbursed

Financial institutions typically give you two disbursement options: Leave the interest in the CD until it matures to let it continue to compound; or 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.

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. Otherwise, you might find yourself scrambling for paperwork while filling out your application.

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).

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 a minimum deposit of $2,000.
  • 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.
  • You can open a CD with Barclays Bank for a variety of terms with no minimum balance required.

As you can see, there is a wide range of minimum deposit requirements. 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.

Bottom line

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.

Featured image by Chaay_Tee of Shutterstock.

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Written by
Sarah Sharkey
Contributing Writer
Sarah Sharkey is a contributing writer for Bankrate. Sarah writes about a range of subjects, including banking, savings tips, homebuying, homeownership and personal finance.
Edited by
Wealth editor
Reviewed by
Professor of finance, Creighton University
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Part of  Introduction to Certificates of Deposit