A certificate of deposit (CD) offers a low-risk way to invest your money and receive a guaranteed interest rate. Typically, CDs earn higher interest rates than checking, savings, or money market accounts.
As a general rule, bank or credit union CDs hold your money for a predetermined amount of time as it earns a set interest rate. However, there are “flavors” of CDs that tweak this formula slightly. To find the best CD for you, let’s find out how to choose among various CD types, minimum deposit requirements, interest rates, and make sure your money is insured.
Key Takeaways
- CD interest is typically higher than savings accounts, and ones offered by banks are FDIC-insured for up to $250,000.
- CDs earning the best interest rates tend to have longer terms and/or require higher deposits.
- When thinking about CDs, consider term length, your access to cash, penalties and fees, minimums, and the ability to add funds.
Types of CDs
There are many types of certificates of deposits (CDs) available via online and brick-and-mortar banks, credit unions, and investment firms. To find the best fit for you, it’s important to understand the differences between the most common ones available.
Term CDs
These CDs have terms or investment periods ranging from as short as three months to as long as 10 years. Throughout the term, your interest rate is locked in and consistent. Although you may be able to withdraw any interest earned throughout the term, if you withdraw your original CD deposit early, you’ll likely pay a penalty.
Term CDs could be considered the vanilla flavor of CDs. Short-term CDs may be best for those new to CDs who are hoping for simple, dependable rates and time frames. You can combine term CDs in CD ladders.
Jumbo CD
Jumbo CDs require a substantial initial deposit—typically a minimum of $100,000—but otherwise work like term CDs, with some options available for as short as seven days.
These CDs may be a good choice if you have a large amount of cash for investment but don’t want to risk loss through stocks or other fluctuating investments.
High-Yield or High-Growth CDs
Some banks and credit unions promote “high-yield CDs,” but there aren’t any regulations around what may be just a marketing term. Some so-called high-yield CDs may sport lower or similar interest rates than CDs without the high-yield term attached. Compare CD rates without automatically signing up for the first CD promoted as high yield.
Rate-Raising or Bump-Up CDs
If you’re concerned about locking up your money at a lower interest rate only to watch rates rise over time, these CDs allow you to raise your rate once or twice throughout the CD’s lifespan, either automatically or by request. However, the lifespans offer limited options (such as two- or four-year terms).
Rate-raising CDs could be a good fit if you think interest rates are only going up and you’ll miss out. However, if the rate rise depends on your request, you might consider whether you’ll follow rates closely or set an alert regarding rates.
note
While CDs provide low to no risk regarding the amount you’ll get in return, they can pose a unique risk when inflation is rampant. Investments with a low, fixed rate of return often can’t keep up with inflation.
Add-on CDs
Most CD types don’t allow you to add extra dollars or your tax refund to your CD. With an add-on CD, however, you can send money via automatic transfer, and many allow very low starter minimum investments.
These CDs could be a good choice if you’d like to contribute over time or don’t have much extra cash initially, but would like to get started anyway.
No-Penalty CDs
No-penalty CDs allow withdrawal of your entire account balance from the CD without paying the penalty. There are a few tradeoffs, however. No-penalty CDs may feature lower interest rates and more limited term options than traditional term CDs. In addition, you won’t be able to withdraw a partial account balance, and you will be unable to access your funds for a set amount of time (typically the first six to seven days or so after funding). Plus, after you take out your money, the CD ends—as you earn on the interest rate.
A no-penalty CD might be right for you if you’d like the security of knowing you could access your money, if necessary, and are willing to offset that access for a lower interest rate.
note
Many banks offer an incentive if you choose to renew your CD. Ally Bank, for example, encourages its no-penalty CD holders to check in 30 days before their CD matures to inquire about its current Loyalty Reward interest-rate bump.
Share Certificates
Credit unions offer “share certificates,” which function much like CDs and often replicate the above-mentioned types. The credit union holds your money for a period of time, such as three months to seven years. In exchange, you receive a guaranteed interest rate that’s usually higher than average. Credit unions may also offer Youth CDs for younger credit union members up to a specific age, such as 18 or 23.
Share certificates could be a good fit for credit union members who want to keep money within the credit union system or encourage their teens to save with a CD.
IRA CD
This is a CD stored in your individual retirement account (IRA). Many IRA CDs are term based, although some banks might offer interesting variations, such as the ability to add to the CD or earn a higher interest rate as your CD balance rises. IRA CDs are best for those saving long term for retirement who don’t need immediate access to the funds.
Other CD Types
Less-common CD types could include market-linked CDs tied to the stock market and variable-rate CDs with fluctuating rates but a “floor” it won’t drop below. These may be a good fit if you’re ready to thoroughly read the fine print and map out the best- and worst-case scenarios.
You can also consider a brokered CD, which is bought and resold through intermediaries such as investment firms or independent salespeople. An advantage with brokered CDs is that you can deposit large amounts of money in different banks through the brokerage firm. You’ll want to keep each one under $250,000 since that’s the maximum amount insured by the FDIC.
Like a stock, you can sell a brokered CD before the maturity date, leading you to earn more money than you would have if you held onto it should interest rates fail. These may be good fits for savvy investors with CD experience.
Term Length
When considering your CD term choices, think about the risks and rewards. In general, the longer you tie up your money on a CD, the better your interest rate—as you can see in our best CDs roundup. A CD that matures in a year to two years may have an interest rate double or triple that of a three-month CD, for example.
But fluctuating interest rates can also impact your decision on term length. If you think rates will go up, you might not want to lock in today’s interest rate for long. If you think rates are going down, you could choose a longer-term CD.
Your goals can also affect the risk and reward. If you’re saving for your child’s college, you might not be concerned about access to cash right now. However, if you’re trying to find a higher-interest-rate option for emergency funds, a five-year CD may not give you the necessary access to your cash.
Some investors use a CD ladder strategy to balance timing-related risk and reward. With this strategy, you use multiple CDs of short and longer terms, so CDs are maturing consistently—around once a year. If you don’t need the funds, you can roll your expired shorter-term CD into a new, longer-term one. You may be able to take advantage of increasing interest rates as well.
Minimum Deposit
CD minimum deposits vary greatly depending on the CD issuer. For example, some banks will allow you to open a CD with as little as $0 (you’ll have a set time period to add funds), while others may require $50 or $1,000.
Depending on the bank or credit union, the amount you put into the CD can impact your interest rate. Putting in a larger amount—such as $25,000 or $100,000—could earn you a higher interest rate, even if you don’t take out a jumbo CD.
note
Some add-on CDs will allow you to increase your initial investment over time; however, most CDs don’t allow this. Be sure to explore all your options before deciding on the right deposit amount for your goals.
Compound vs. Simple Interest
You may be offered simple interest or compound interest on your CD, depending on the financial institution. Simple interest pays interest on your initial deposit. Compound interest pays interest on your initial deposit and interest you’ve earned so far. If you plan to keep your funds in the CD (versus withdrawing interest during the term), a CD paying compound interest may be a good choice.
CD interest can be compounded monthly or daily. Daily compounding interest pays you slightly more over time. For example, if you have $10,000 invested for one year at 1% interest compounded monthly, you’ll receive $10,100.46. With daily compounding, it’s $10,100.50—just four cents more. As interest rates increase or with larger amounts in the CD, the daily compounding’s advantages grow.
Fees, Penalties, and Other Costs
When deciding on a CD, compare any penalties you might be charged for early withdrawal. If you need your money now or want to put your money into a higher-rate CD, you could decide to “break” your CD and withdraw your funds. Early withdrawal typically leads to a bank penalty based on interest, a percentage, or a flat fee. Some banks may extract penalties of various types, such as a percentage of the withdrawal plus a flat fee.
Just about any CD based on a term or length of time charges a daily or monthly interest penalty based on the CD’s term—for example, three months’ interest for a CD term of less than a year, or six months’ interest for a CD term of more than one year.
Federal law sets no maximum penalty for early withdrawal. Think of the worst-case scenario. How could bank A’s penalty stack up against bank B’s for the same deposit amount? Bank A may offer higher interest rates, with penalties to match.
You may face additional risk and fees with a brokered CD, such as percentage-based or fixed fees per investment. If you sell before maturity, you could pay transaction costs. For example, if you buy or sell a CD on a brokerage’s secondary marketplace, you could pay $1 per $1,000 CD.
note
While you’re often charged a penalty for closing out your CD early, some CDs may be “callable” by the bank, which means the bank can end the contract early. You’re owed interest up to the call date on your initial deposit, but the bank does not pay any penalty. Find out if your CD is callable.
FDIC Insurance
The FDIC insures $250,000 per depositor at an insured bank. This means you can have multiple CDs at different banks, each insured up to $250,000. However, if you have $350,000 savings, cash, and a CD at one bank, the total amount insured could be limited to $250,000 for that bank. Credit union CDs or accounts are similarly insured per credit union for up to $250,000 by the National Credit Union Administration.
note
Some brokered CDs are not federally insured, so be sure to ask or otherwise confirm before buying.
Frequently Asked Questions (FAQs)
When is a certificate of deposit the best banking choice?
A certificate of deposit or CD may be a good decision if you’re seeking low to no risk regarding how much you’ll earn but are hoping for better rates than you’d find with a savings account. However, CDs carry purchasing power risk—in a high-inflation environment, there’s a good chance the money you invest won’t keep up with inflation.