A CD is a savings account where you agree to leave money untouched for a set time 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 agree not to withdraw that money until a specific date arrives. That date is called the maturity date. When it passes, your money is yours to take out, along with all the interest earned.
The trade-off is straightforward: you get a higher interest rate than a regular savings account offers, but you lose access to your money during the CD term. If you withdraw before maturity, you pay a early withdrawal penalty — usually a few months' worth of interest, though the exact amount varies by bank and CD length.
CDs come in different lengths. A bank might offer 3-month, 6-month, 1-year, 2-year, 3-year, or 5-year terms. The longer you lock your money away, the higher the interest rate typically is. A 5-year CD will usually pay more than a 1-year CD at the same bank.
Key Takeaways
- A CD pays a fixed interest rate for a fixed period; you cannot withdraw without penalty until the maturity date arrives.
- Interest rates on CDs are higher than savings accounts because the bank knows your money will stay put for months or years.
- Early withdrawal penalties are real costs — usually several months of interest — so only use CD money you will not need before maturity.
- When your CD matures, you can withdraw the money, move it to another CD, or let it roll over into a new CD at the bank's current rate.
How interest works on a CD
The bank tells you the annual percentage yield (APY) when you open a CD. This is the total interest you will earn in one year if you leave the money untouched. If you open a 1-year CD with a 4.5% APY and deposit $5,000, you will have $5,225 when it matures — the original $5,000 plus $225 in interest.
For CDs longer than one year, the math works the same way each year. A 2-year CD at 4.5% APY on $5,000 will grow to roughly $5,461 at maturity (the interest compounds, meaning you earn interest on your interest). The bank calculates and adds the interest automatically; you do nothing.
Interest rates change constantly. The rate you see today may not be available next week. Banks set their own rates based on what the Federal Reserve does and what other banks are offering. If you see a rate you like, locking it in with a CD means you keep that rate for the entire term, even if rates drop later.
What happens when a CD reaches maturity
On the maturity date, you have choices. You can withdraw all the money (principal plus interest) and do something else with it. You can open a new CD at the same bank or a different one. Or you can do nothing, and many banks will automatically roll over your CD into a new one at the current rate — which may be higher or lower than what you just earned.
Automatic rollover is a trap if rates have fallen. Your money will be locked up again at a worse rate, and you may not notice until months later. Read the fine print when you open a CD, and mark your calendar for the maturity date. If you do not want to roll over, contact the bank a few days before maturity and tell them to send you the money instead.
Early withdrawal penalties and when they apply
If you need your money before the maturity date, the bank will let you take it — but they will subtract a penalty. The penalty is usually expressed as a number of months of interest. A CD with a 3-month penalty means the bank keeps three months' worth of the interest you earned. On a $5,000 CD earning $225 per year, that is roughly $56 gone.
Some banks charge larger penalties for longer CDs. A 5-year CD might have a 6-month or 12-month penalty. A few banks offer no-penalty CDs that let you withdraw early without losing interest, but these pay lower rates than standard CDs. The trade-off is real: lower rate, or accept the penalty risk.
Penalties are calculated from your interest, not your principal. You always get your original deposit back. But if you withdraw very early, the penalty might eat up all or most of the interest you earned, leaving you with almost the same amount you started with — which defeats the purpose of the CD.
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. But the interest rate is much lower — often 0.01% to 0.5% APY. A CD pays 4% to 5% or higher right now, depending on the term and the bank.
A money market account sits in the middle. It pays more than a savings account but less than a CD, and it lets you write checks or make withdrawals (usually with a limit on how many per month). If you need some flexibility but want better returns than a savings account, a money market account is worth comparing.
The choice depends on your timeline. If you know you will not need the money for two years, a 2-year CD locks in a high rate and removes the temptation to spend it. If you might need it sooner, a savings account or money market account costs you interest but keeps your options open.
FDIC insurance and safety
Money in a CD at a bank is protected by FDIC insurance up to $250,000 per depositor, per bank. This means if the bank fails, the federal government guarantees you get your money back. Credit unions offer the same protection through the NCUA (National Credit Union Administration), also up to $250,000.
If you have more than $250,000 to save, you can open CDs at multiple banks to stay within the limit at each one. Each bank's $250,000 limit is separate. A $300,000 CD at Bank A and a $200,000 CD at Bank B means you are fully insured at both.
Where to open a CD and how to compare rates
You can open a CD at any bank or credit union. Online banks often pay higher rates than brick-and-mortar banks because they have lower overhead costs. A CD at an online bank pays the same interest whether you visit a branch or not — there is no branch to visit.
To compare, use a rate-tracking site like Bankrate, DepositAccounts, or the FDIC's own rate search. These sites list current rates from dozens of banks for each CD term. You can sort by rate, by bank, or by term length. Write down the APY, the term, and the early withdrawal penalty for each one you are considering, then decide which fits your situation.
Opening a CD takes minutes. You will need your Social Security number, a government ID, and proof of address. Most banks let you open online. The money can come from another account at the same bank or from an external account (which takes a few business days to link).
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 on day one, and that amount stays the same until maturity. If you want to save more, you open a separate CD or use a savings account. Some banks offer add-on CDs that let you deposit more during the term, but these are rare and usually pay lower rates.
What happens if I need my money before the maturity date?
You can withdraw it, but you will pay an early withdrawal penalty. The penalty is usually a few months of interest. Calculate whether the interest you have earned so far is more than the penalty; if it is not, you will end up with less than you started with. Check your CD's terms to see the exact penalty before you open it.
Is the interest rate on a CD may provide to stay the same?
Yes, for the entire term. Once you lock in a rate, the bank cannot change it. If rates rise, you keep your original rate. If rates fall, you keep your original rate. That is the whole point of a fixed-rate CD — certainty.
What is the difference between APY and APR on a CD?
APY (annual percentage yield) includes compounding — the interest you earn on your interest. APR (annual percentage rate) does not. Banks must show you the APY on CDs, so that is the number to use when comparing. APY is always higher than APR on the same CD.
Should I open a CD if interest rates are expected to rise?
That depends on how soon rates might rise and how much higher they might go. If you lock in 4.5% for two years and rates jump to 5.5%, you will regret it. But if you need the money in one year anyway, a 1-year CD at 4.5% is fine — you can open a new one at the higher rate when it matures. Shorter CDs give you more flexibility to take advantage of rate increases.