A certificate of deposit is a savings account where you agree to leave money untouched for a set period in exchange for a higher interest rate

A certificate of deposit (CD) is a contract between you and a bank or credit union. You give them a lump sum of money, they promise to pay you a fixed interest rate, and you promise not to withdraw that money until a specific date arrives. That date is called the maturity date. On that date, you get your original money back plus the interest earned.

The trade-off is straightforward: you get a better interest rate than a regular savings account offers, but your money is locked away. If you need the money before the maturity date, you will pay an early withdrawal penalty — usually a few months' worth of interest, though the exact amount varies by institution and CD term.

CDs come in different lengths. You might buy a 3-month CD, a 1-year CD, a 5-year CD, or longer. The longer the term, the higher the interest rate typically is, because the bank gets to hold your money for a longer time.

Key Takeaways

  • A CD locks your money for a set period (3 months to 5 years or more) in exchange for a fixed interest rate higher than a savings account.
  • You pay an early withdrawal penalty if you take the money out before the maturity date, usually equal to several months of interest.
  • When the maturity date arrives, your CD automatically matures and you receive your principal plus all interest earned.
  • CDs are insured by the FDIC (at banks) or NCUA (at credit unions) up to $250,000 per account, so your money is protected even if the institution fails.

How the interest rate and term length work together

The interest rate on a CD is set when you open it and does not change. If you open a 1-year CD at 4.5%, you will earn 4.5% for the full year, regardless of whether market rates rise or fall. This predictability is one reason people choose CDs — you know exactly what you will have at maturity.

Longer terms almost always pay more. A 3-month CD might pay 4.0%, a 1-year CD might pay 4.5%, and a 5-year CD might pay 5.0%. The bank pays more because it gets to use your money for longer. However, rates change constantly based on what the Federal Reserve does, so the rates available today will not be the same next month.

Some banks offer bump-up CDs or step-up CDs, which let you increase your rate once or twice during the term if rates rise. These typically start at a slightly lower rate than a standard CD. Others offer no-penalty CDs, which let you withdraw early without a penalty, though the interest rate is lower to compensate.

What happens when your CD reaches maturity

When the maturity date arrives, your CD automatically matures. The bank deposits your principal plus all earned interest into your linked account — usually a checking or savings account you named when you opened the CD. You do not have to do anything; the process is automatic.

At that point, you have a choice. You can withdraw the money, move it to another account, or let the bank roll it into a new CD at whatever the current rate is. If you do nothing, most banks will automatically renew your CD into a new one with the same term. Read the renewal terms carefully, because the new rate will be whatever the bank is offering at that time, not the rate you had before.

If you want to avoid an automatic renewal, contact your bank a few days before maturity and tell them not to renew. Some banks give you a grace period (usually 7 to 10 days after maturity) during which you can withdraw the money without penalty if you change your mind about renewing.

Early withdrawal penalties and when they apply

If you withdraw money from a CD before the maturity date, you will owe an early withdrawal penalty. The penalty is usually expressed as a number of months of interest. A CD with a 6-month interest penalty means you lose 6 months' worth of the interest you would have earned.

The penalty is deducted from your interest, not from your principal. If you earned $100 in interest but the penalty is $75, you get $25 in interest and your full principal back. However, if the penalty is larger than the interest you have earned so far, you will lose some of your principal.

Some banks publish their penalty terms clearly; others bury them in the fine print. Before you open a CD, ask the bank or credit union what the early withdrawal penalty is. This matters most if you think you might need the money before maturity.

FDIC and NCUA insurance protection

Money in a CD at a bank is insured by the FDIC (Federal Deposit Insurance Corporation) up to $250,000 per depositor, per bank. Money in a CD at a credit union is insured by the NCUA (National Credit Union Administration) up to the same amount. This means if the bank or credit union fails, you get your money back, even if the institution cannot pay.

The $250,000 limit applies to your total deposits at that one institution across all account types. If you have a savings account with $100,000 and a CD with $100,000 at the same bank, you are covered for both. If you have $200,000 in CDs at the same bank, you are covered for all of it. But if you have $300,000 in CDs at the same bank, only $250,000 is insured.

If you want to hold more than $250,000 in CDs and keep it all insured, open accounts at different banks. Each bank's FDIC coverage is separate.

CDs versus savings accounts and money market accounts

A regular savings account has no maturity date and no penalty for withdrawal. You can take money out whenever you want. In exchange, the interest rate is lower — often 0.01% to 0.5% at large banks, though online banks may offer higher rates. A CD locks your money but pays more interest.

A money market account sits between the two. It usually pays more interest than a savings account but less than a CD. You can withdraw money, but there are limits — typically 6 withdrawals per month, and some banks charge a fee if you exceed that. Money market accounts are useful if you want better returns than savings but need more access to your money than a CD allows.

The choice depends on your goal. If you have money you will not need for a year or more, a CD locks in a higher rate. If you might need the money sooner, a savings account or money market account gives you flexibility.

How to compare CDs across banks

CD rates vary significantly between banks. A large national bank might offer 4.0% on a 1-year CD, while an online bank might offer 4.8% for the same term. Over a year, that difference adds up. Before you open a CD, check rates at several institutions.

When comparing, look at three things: the interest rate (called the APY, or annual percentage yield), the term length, and the early withdrawal penalty. A higher rate is better, but only if you can actually leave the money alone for the full term. A CD with a steep penalty is risky if you think you might need the money.

Some websites list CD rates from multiple banks, making it easier to compare. You can also call banks directly or visit their websites. Rates change frequently, so check shortly before you plan to open the CD.

Frequently Asked Questions

Can I withdraw money from a CD before it matures?

Yes, but you will pay an early withdrawal penalty. The penalty is usually several months of interest. If the penalty is larger than the interest you have earned, you lose part of your principal. Some banks offer no-penalty CDs that let you withdraw early without a penalty, though they pay a lower interest rate.

What is the difference between APY and interest rate on a CD?

APY (annual percentage yield) is the actual return you will earn, including the effect of compounding. The interest rate is the base rate. For CDs, the difference is usually small, but APY is the number to use when comparing CDs across banks because it shows the true return.

What happens if the bank fails while I have a CD?

Your money is insured by the FDIC (at banks) or NCUA (at credit unions) up to $250,000. If the bank fails, you get your principal plus all interest earned, even if the bank cannot pay. The insurance is automatic; you do not need to do anything.

Can I open multiple CDs at the same bank?

Yes. You can open as many CDs as you want at the same bank. However, FDIC insurance covers only $250,000 total across all your accounts at that bank. If you want to hold more than $250,000 in CDs and keep it all insured, open accounts at different banks.

Is a CD a good choice if I think interest rates will rise?

If you lock money into a CD and rates rise, you will be stuck earning the lower rate you agreed to. Some banks offer bump-up CDs that let you increase your rate once if rates rise, though they start at a slightly lower rate. If you expect rates to rise significantly, a shorter-term CD or a savings account might be a better choice.