What a CD does and why you might open one
A certificate of deposit is an account where you deposit money for a fixed period—usually three months to five years—and the bank pays you a set interest rate for leaving it there. You agree not to touch the money until the term ends. In return, the bank gives you a higher interest rate than a regular savings account.
The trade-off is simple: you lock up your cash, and the bank pays you more for it. If you need the money before the term is up, you pay an early withdrawal penalty—usually a few months' worth of interest. This makes CDs useful if you have money you won't need soon and want a may provide return without the risk of the stock market.
CDs work best for money you're setting aside for a specific goal six months or more away—a down payment, a car, a home repair fund—or for cash you simply don't want to be tempted to spend.
Key Takeaways
- You deposit a lump sum, choose a term length, and receive a fixed interest rate that does not change for the life of the CD.
- Your money is insured up to $250,000 per depositor per bank by the FDIC, so the principal is protected even if the bank fails.
- Early withdrawal before the term ends triggers a penalty, usually three to six months of interest, so only deposit money you won't need.
- CD rates vary by bank, term length, and deposit amount, so comparing offers across banks before opening one saves you money.
- When the term ends, the bank automatically renews the CD at the current rate unless you tell them to do something else with the money.
How to choose a CD term and deposit amount
CD terms range from three months to five years, with some banks offering longer or shorter options. Shorter terms (three to six months) pay lower rates but let you move your money sooner if rates rise. Longer terms (two to five years) pay higher rates but lock you in longer. Choose based on when you'll actually need the money—if you're saving for something happening in two years, a two-year CD matches your timeline.
Deposit amounts vary by bank. Most require a minimum of $500 to $2,500 to open a CD, though some online banks have minimums as low as $100 or none at all. The amount you deposit is the amount you'll earn interest on, so deposit what you can afford to leave untouched for the full term. You can open multiple CDs at the same bank if you want to spread your money across different terms.
The FDIC insures each CD up to $250,000 per depositor per bank. If you have more than $250,000 to deposit, split it across different banks to keep all of it insured.
Where to open a CD and what to compare
You can open a CD at a traditional bank, a credit union, or an online bank. Online banks typically offer higher rates because they have lower overhead costs. Traditional banks and credit unions offer lower rates but may have branches you can visit in person.
Before opening a CD, compare the interest rate, the term length, the minimum deposit, and the early withdrawal penalty across at least three institutions. The interest rate is the most visible number, but the penalty matters just as much—a bank offering 4.5% with a six-month penalty is worse than one offering 4.3% with a one-month penalty if you think you might need the money early.
Check the bank's website or call directly to get current rates. Rates change weekly, sometimes daily, so the rate you see today may not be the rate you get tomorrow. Many banks let you lock in a rate by opening the account online in minutes, so once you find one you like, move quickly.
The mechanics of opening and funding a CD
Opening a CD online takes 10 to 15 minutes. You'll provide your name, address, Social Security number, and employment information. The bank will verify your identity and run a background check using ChexSystems, a banking history database. Most people pass this check without issue.
Once approved, you'll choose your term and deposit amount, then fund the account. You can transfer money from another bank account (usually takes one to three business days) or deposit a check by mail. Some banks let you fund immediately from a debit card, though this may trigger a small fee.
At a physical bank or credit union, you'll bring your ID and the cash or check you want to deposit, fill out a form, and the teller will open the account on the spot. You'll receive a receipt showing your term end date and the interest rate locked in.
What happens when your CD matures
When your term ends, the bank sends you a notice (usually 10 days before) telling you the CD is maturing. At that point, you have three choices: let the bank automatically renew it at the current rate, withdraw the money, or move it to a different product.
Automatic renewal happens if you do nothing. The bank will renew your CD for the same term at whatever rate they're currently offering. This rate may be higher or lower than what you earned before. If rates have dropped significantly, you might want to withdraw the money and shop around instead of accepting the renewal rate.
If you want to withdraw, the money goes back to the account you originally funded from, or the bank sends you a check. There's no penalty for withdrawing after the term ends—the penalty only applies if you withdraw early.
Early withdrawal penalties and when they apply
If you need your money before the term ends, you can withdraw it, but the bank charges a penalty. The penalty is usually expressed as a number of months of interest. A CD with a three-month penalty means you lose three months' worth of the interest you've earned so far.
Example: You open a one-year CD with $10,000 at 4% annual interest. After six months, you need the money. You've earned about $200 in interest. A three-month penalty costs you $50 (three months of the $200 annual interest). You receive $10,150 instead of $10,200.
Some banks charge a flat dollar amount instead of months of interest, or they charge a percentage of the deposit. Read the disclosure document before opening the CD so you know exactly what you'll lose if you withdraw early. If there's any chance you'll need the money, factor the penalty into your decision.
CDs versus other savings options
A high-yield savings account works like a CD but without the lock-in period. You can withdraw money anytime without penalty, but the interest rate is usually lower and can change monthly. A high-yield savings account is better if you might need the money within the next few months.
A money market account is a hybrid: it pays interest like a savings account but requires a higher minimum deposit and may limit how often you can withdraw. Money market accounts usually pay more than regular savings accounts but less than CDs.
Treasury bills (T-bills) are short-term loans to the federal government that mature in four weeks to one year. They're backed by the U.S. government, so they're extremely safe, but they require a minimum investment of $100 and are bought through the Treasury Department website or a broker. T-bills currently pay rates competitive with CDs for short terms.
Frequently Asked Questions
Can I withdraw money from a CD before it matures?
Yes, but you'll pay an early withdrawal penalty. The penalty is usually three to six months of interest, though it varies by bank and CD term. Read the disclosure before opening to know the exact cost. After the term ends, you can withdraw without penalty.
What happens if the bank fails while my money is in a CD?
Your CD is insured by the FDIC up to $250,000. If the bank fails, the FDIC pays you the full amount of your deposit plus any interest earned up to the maturity date. Your money is safe even if the bank goes under.
Can I open a CD with a very short term, like one month?
Some banks offer one-month or three-month CDs, but they pay very low rates because the term is so short. A high-yield savings account usually pays more for money you need access to within a few months. Check both options before deciding.
Do I have to renew my CD when it matures?
No. When your term ends, you can withdraw the money, move it to a different account, or let the bank renew it automatically. If you do nothing, most banks renew automatically at their current rate, so check the renewal rate before the maturity date arrives.
Are CD interest rates may provide?
Yes, for the full term. The rate you lock in when you open the CD stays the same until it matures, even if the bank's rates change. This is the main advantage of a CD—you know exactly what you'll earn.