The Federal Reserve’s significant increases in interest rates this year are painful for consumers who carry credit card balances or need loans to buy houses, cars and other goods. Aggressive rate hikes have also had a negative effect on the stock market.

But there is a bright side to these rate moves, and that is that they give savers opportunities for growth. As interest rates rise, banks and credit unions usually follow suit and start paying higher yields on deposit products, such as certificates of deposit (CDs).

Reasons to invest in CDs

With inflation at a 40-year high and a bearish stock market, CDs are a savings tool worth considering, for several reasons:

  • Annual percentage yields (APYs) on CDs are on the upswing, so the earnings potential is growing.
  • Rates on standard CDs are fixed. Unlike the stock market, which fluctuates, CDs offer a reliable return.
  • CDs may pay more than other deposit accounts, such as savings and money market accounts.
  • CDs make planning and budgeting easy because savers know exactly how much they will earn over a given time and when the money can be withdrawn.
  • You can create a steady income stream for yourself by laddering CDs.
  • CDs at federally insured banks and credit unions are protected.

“The outlook for CD investors over the next year is much better than what they’ve endured the past three years,” says Greg McBride, CFA, Bankrate chief financial analyst. “Interest rates are rising, and eventually inflation will fall.

“This is quite the turnaround from the environment of falling CD yields and then soaring inflation endured from 2019 to 2022.”

Tips for choosing the best CD

Perhaps the most important thing to do before putting money in a CD is to determine your goals. Take stock of your financial situation and decide what it is you want to achieve with your investment.

Before opening a CD, make sure you have enough money in your emergency fund, at least three to six months of living expenses. This is money that should not be locked up in a CD, but is better off in a liquid savings account.

1. Decide the right term length

CDs typically require that you invest your money for a specific amount of time, called a term. During the term, you agree not to withdraw the money.

CD terms can range from as brief as a month to as long as five years, seven years – even 10 years at some banks. That’s why you should know your goals and how much money you can afford to tie up and for how long.

Are you saving up to buy a car, take a vacation or make a down payment on a house? Determine when you need that money to choose a CD with the right term.

“Because of early withdrawal penalties, it is important to align the point where you’ll need the money with the maturity of the CD,” says McBride. “Liquid and no-penalty CDs exist, and are a consideration, but often carry lower yields because of the flexibility.”

2. Shop for the best rates

With any investment product, the aim is to grow your money as much as possible. National averages for CD rates are low compared with what you can find by shopping around. For example, the national average for a one-year CD is just 0.96 percent APY, according to Bankrate’s latest weekly survey. But there are banks – especially online banks – that pay 3 percent APY and higher.

Online banks often pay better rates because they do not have the overhead of maintaining branches that traditional brick-and-mortar banks have.

Bankrate.com does the work for you by finding the best CD rates for a broad range of CD terms.

3. Pick a CD with a minimum deposit you can afford

Financial institutions differ on the size of the deposit required to open a CD. Some banks, such as Ally Bank and Synchrony Bank, do not have deposit minimums.

Many banks, though, require you to put down at least $500 or $1,000. Others require $5,000 or more. The minimum deposit requirement may depend on the type of CD you open. Jumbo CDs often require deposits of $100,000.

Your deposit will be tied up for the CD term, whether it’s one year or five years or longer. Choose a CD with an opening deposit you can afford to keep invested until the CD matures.

4. Check for early withdrawal penalties

Banks penalize CD account holders who withdraw their money before the CD matures. To find the details of these charges, read the fine print of your account agreement.

Early withdrawal penalties can vary widely, from 60 days of interest to 365 days or more of interest. Typically, the longer the CD term, the higher the penalty fees.

If you open a CD through a broker, you will pay a fee. But since it’s easy to find the best CD rates and products on your own, it hardly seems necessary to pay a broker to do it for you.

5. Choose the right type of CD

CDs come in many varieties and it’s smart to know what they are because you might find one that suits you better than a traditional CD.

For example, a no-penalty CD, sometimes called a liquid CD, doesn’t penalize you for withdrawing your money before the term ends. If you think you might need the money before the CD matures, or you want the option to withdraw it penalty-free to pursue a better investment, a no-penalty CD can be a good choice. The trade-off is the APY probably will be lower than it is on a traditional CD.

If you expect to get a nice bonus at work, you might consider an add-on CD, which lets you add money to the account during the term. IRA CDs are an alternative that tend to have lower yields, but they have tax advantages.

Bump-up and step-up CDs are slightly different, but both products let you obtain a higher yield if rates rise.

Explore different types of CDs and make the best choice for your circumstances.

6. Find a federally insured bank or credit union

Shop only with banks and credit unions that are protected by the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Association (NCUA) Share Insurance Fund. If your bank or credit union were to fail, your money would be protected.

Federal deposit insurance covers up to $250,000 per depositor, per FDIC bank, per account ownership category. Some banks offer a service that spreads money around to a network of insured banks to give customers with large deposits more insurance coverage.

You can use this tool to find FDIC-member banks or this tool to find NCUA-member credit unions.

Bottom line

A CD can be a high-yield, safe investment when you’re able to lock in the money for a set term. To get the most for your money, be sure to shop around for the best rate, select a term you’re comfortable with and go with a bank or credit union that’s federally insured.