What is a CD (certificate of deposit)?

A certificate of deposit (CD) is a type of savings account that earns a fixed interest rate for a specific period. Unlike regular savings accounts, CDs require you to leave your money untouched until the term ends. The term end is also known as the maturity date, and you earn a fixed rate of return that won’t change regardless of market conditions. 

This makes CDs ideal for short-term savings goals with specific timelines, such as saving for a house down payment in 18 months or a vacation for next year. It’s also smart to lock in CD rates when they’re high to get the most out of your deposit.

CDs 101

CDs work differently to other savings accounts. You usually can’t add money to one after you open it or withdraw the money at will. In exchange, you typically earn a fixed rate of return over the CD term.

• CD terms and rates: Most CDs offer terms ranging from three months to five years, with some banks offering terms as short as one month or as long as 10 years. Generally, longer terms offer higher interest rates as compensation for locking up your money for an extended period.
• Fixed vs. variable rates: Traditional CDs offer fixed rates, meaning your APY remains constant throughout the term. This predictability allows you to calculate exactly how much interest you’ll earn using Bankrate’s CD calculator. Variable rates, like those for normal savings accounts, can change at any time, meaning you won’t get a guaranteed rate of return.
• Early withdrawal penalty: Most CDs charge early withdrawal penalties if you withdraw funds before maturity. These penalties typically equal 90 to 365 days of interest, depending on the CD term length. For example, a one-year CD might have a 180-day interest penalty, while a five-year CD could impose a full year’s worth of interest as a penalty.
• Minimum opening deposit: Some banks don’t require any minimum deposit when you open your CD, while others may require amounts such as $500, $2,500 or more. At some institutions, larger deposits may qualify for higher APYs or special rate tiers.
• Grace period: When a CD’s term ends, banks provide a grace period of five to 10 days, during which you can either withdraw the money or roll it into a new CD. If you make no changes during the grace period, most banks will automatically roll the balance into a new CD.

CDs vs. savings accounts: Key differences

While both CDs and savings accounts help you grow money safely, they serve different purposes in your financial strategy.

Are CDs safe?

Federal Deposit Insurance Corporation (FDIC) and National Credit Union Share Insurance Fund (NCUSIF) protection makes CDs virtually risk-free investments, as your principal and accrued interest are protected even if the financial institution fails. However, you’ll still face early withdrawal penalties if you access funds before maturity, and inflation can erode your purchasing power over time.

CDs from FDIC-insured banks and NCUSIF-insured credit unions receive the same deposit protection as other bank accounts, covering up to $250,000 per depositor, per ownership category, per insured bank. 

Bankrate staff insights

When CDs make financial sense

When CDs make financial sense

A CD can be quite useful when you’re saving for a planned purchase on a set timeline, such as buying a car in two years. Locking in a high yield ensures your earnings won’t be affected if yields on new CDs go down during that time. Before committing to a CD, though, be sure you won’t need the money for bills or other expenses in the meantime.

Karen Bennett, Bankrate consumer banking reporter

Types of CDs

While traditional CDs dominate the market, several specialized types of CDs offer additional features for specific needs.

Bottom line

Certificates of deposit offer guaranteed returns and principal protection, making them valuable tools for savers with specific financial goals. They work best when you can commit to leaving money untouched for the full term and are looking for predictable returns.

High-rate environments make CDs particularly attractive, allowing you to lock in competitive returns for months or years. However, they’re not suitable for emergency funds or money you might need unexpectedly.

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