A bank certificate is a savings product where you deposit money for a fixed period and earn a may provide interest rate in return

A certificate of deposit (CD) is a contract between you and a bank. You give the bank a lump sum of money, agree not to touch it for a set time period (called the term), and the bank pays you interest on top of what you deposited. The interest rate is locked in when you open the account, so you know exactly how much you'll have when the term ends.

The most common terms are three months, six months, one year, two years, and five years, though banks offer other lengths too. The longer you agree to leave your money untouched, the higher the interest rate the bank will usually offer you. If you need the money before the term is up, you'll pay an early withdrawal penalty—typically a few months' worth of interest, though the exact amount depends on the bank and the term length.

CDs are different from regular savings accounts because the rate doesn't change and you can't add money to the account after you open it. They're also insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor per bank, the same way regular checking and savings accounts are.

Key Takeaways

  • You deposit a fixed amount of money for a set period (three months to five years or longer) and receive a may provide interest rate that doesn't change.
  • The longer the term you choose, the higher the interest rate typically is, so a five-year CD usually pays more than a three-month CD at the same bank.
  • Withdrawing your money before the term ends costs you an early withdrawal penalty, usually several months of interest.
  • Your deposit is insured by the FDIC up to $250,000, so your principal is protected even if the bank fails.
  • CDs work best for money you won't need soon and want to grow at a predictable rate without the risk of stock market changes.

How the interest rate and term length work together

Banks set CD rates based on what the Federal Reserve is doing with interest rates and what other banks are offering. When the Fed raises rates, new CDs tend to pay more. When the Fed cuts rates, new CDs pay less. The rate you lock in is only good for the CD you're opening right now—if rates go up next month, your existing CD won't pay the higher rate.

Term length is the main lever you control. A three-month CD at your bank might pay 4.5% annually, while a five-year CD at the same bank might pay 5.2%. The bank is willing to pay you more because you're committing your money for longer and the bank can lend it out for a longer period. The tradeoff is that your money is locked up, and accessing it early costs you.

Some banks also offer "no-penalty CDs," which let you withdraw your money early without a penalty—but these almost always pay a lower interest rate than standard CDs because the bank is taking on more risk.

What happens when your CD term ends

When your CD reaches its maturity date (the end of the term), the bank will notify you. At that point, you have a few options: you can withdraw the money, let it roll over into a new CD at the current rate, or move it somewhere else.

Most banks have a grace period—usually seven to ten days—during which you can decide what to do without penalty. If you do nothing and the grace period passes, many banks automatically roll your CD into a new one at the current rate for the same term length. Read your CD agreement to see what your bank does, because you don't want to be locked in for another term if you didn't intend to be.

Early withdrawal penalties and when they apply

If you need your money before the maturity date, the bank will charge you an early withdrawal penalty. This penalty is usually expressed as a number of months of interest. For example, a penalty might be "three months of interest," which means if your CD was earning $100 a month in interest, you'd lose $300.

The penalty structure varies by bank and by term length. Longer-term CDs usually have larger penalties because the bank is losing out on a longer period of lending your money. A five-year CD might have a penalty of six months' interest, while a one-year CD might have a penalty of one month's interest.

Some banks calculate the penalty differently—they might subtract a flat dollar amount or a percentage of your deposit. Always ask the bank what the exact penalty is before you open the CD, and get it in writing. The penalty comes out of your deposit, so you might end up with less money than you put in if you withdraw very early.

CDs versus savings accounts and money market accounts

The main difference between a CD and a regular savings account is the rate and the commitment. A savings account lets you deposit and withdraw money whenever you want, but the interest rate is usually lower and can change at any time. A CD locks in a higher rate but locks up your money for the term.

A money market account sits in the middle—it usually pays more than a savings account but less than a CD, and it lets you withdraw money without penalty (though there may be limits on how many withdrawals you can make per month). Money market accounts are good if you want a higher rate but need some access to your cash.

If you have money you won't need for several years and want the highest may provide rate, a CD is usually the better choice. If you might need the money sooner or want flexibility, a savings account or money market account makes more sense.

How to choose a CD term that fits your timeline

The term you choose should match when you'll actually need the money. If you're saving for a down payment you plan to make in two years, a two-year CD is a natural fit—your money grows at a may provide rate and matures right when you need it. If you're not sure when you'll need the money, a shorter term is safer because you'll have access sooner and can decide what to do next.

Some people use a "CD ladder" strategy: they open multiple CDs with different maturity dates (for example, one-year, two-year, three-year, and four-year CDs all at the same time). As each one matures, they can decide whether to withdraw the money, spend it, or open a new CD. This approach gives you regular access to portions of your money while keeping most of it locked in at higher rates.

Before you open a CD, compare rates across banks. Online banks often pay higher rates than brick-and-mortar banks because they have lower overhead costs. The difference can be significant—an online bank might offer 5.0% on a one-year CD while a local bank offers 4.2% for the same term. Over a year, that 0.8% difference adds up.

FDIC insurance and what it protects

Your CD is insured by the FDIC up to $250,000 per depositor per bank. This means if the bank fails, the FDIC will return your deposit and any interest you've earned up to that $250,000 limit. You don't have to do anything to get this protection—it's automatic.

The $250,000 limit applies to all your deposits at that bank combined. If you have a CD for $150,000 and a savings account for $100,000 at the same bank, you're covered for the full $250,000. But if you have $300,000 in CDs at the same bank, only $250,000 is insured. If you want to insure more than $250,000, you can open accounts at different banks—each bank's FDIC coverage is separate.

Frequently Asked Questions

Can I add money to a CD after I open it?

No. A CD is a fixed contract—you deposit a lump sum at the start, and that's the amount that earns interest for the entire term. You cannot add more money to the same CD. If you want to deposit more, you'd need to open a separate CD.

What happens if interest rates go up after I open my CD?

Your rate stays the same for the entire term. If rates rise, your CD will pay less than new CDs being offered. This is the tradeoff for having a may provide rate—you're protected if rates fall, but you don't benefit if they rise. You can open a new CD at the higher rate when your current one matures.

Is there a minimum deposit required to open a CD?

Most banks require a minimum deposit, which varies by bank and sometimes by term length. Common minimums are $500, $1,000, or $2,500. Some online banks have lower minimums or none at all. Check with your bank for their specific requirements.

Can I withdraw my CD money if I have a financial emergency?

You can withdraw the money, but you'll pay an early withdrawal penalty. The penalty is usually several months of interest, so you'll get less than you would have if you'd waited until maturity. If the emergency is severe, it may still be worth it—just understand what you're giving up.

What's the difference between a CD and a bond?

Both are fixed-term investments, but bonds are issued by governments or corporations and can be bought and sold on the open market. CDs are issued by banks and are not traded—you hold them until maturity. Bonds can fluctuate in value; CDs have a may provide value. Bonds are generally riskier and more complex.