A CD rate is the interest percentage a bank pays you for letting them hold your money for a set time
When you open a certificate of deposit (CD), you agree to leave a lump sum of money in the account untouched for a fixed period—usually three months to five years. In exchange, the bank pays you interest at a rate it sets in advance. That rate is the CD rate. Unlike a savings account, where the rate can change whenever the bank decides, your CD rate stays the same for the entire term.
The bank uses your money during that time, so it pays you for the privilege of having it locked up. The longer you agree to leave the money alone, the higher the rate typically is. A one-year CD might pay 4.5%, while a five-year CD might pay 5.2%—but those exact numbers shift based on what the Federal Reserve does with interest rates and what banks decide they need to attract deposits.
When your CD matures (the term ends), you get your original deposit back plus all the interest earned. You can then withdraw the money, open a new CD, or move it elsewhere.
Key Takeaways
- A CD rate is locked in when you open the account and does not change, even if the bank's rates drop the next day.
- Longer CD terms almost always come with higher rates because you are giving up access to your money for more time.
- CD rates vary by bank and change daily based on Federal Reserve policy and market conditions.
- When a CD matures, you receive your deposit plus all accrued interest, and you can then choose what to do with the money.
- Breaking a CD early (withdrawing before maturity) usually costs you a penalty that reduces or eliminates your interest earnings.
Why CD rates are higher than savings account rates
Banks offer higher rates on CDs because you are committing to leave your money there. With a regular savings account, you can withdraw whenever you want, so the bank cannot count on having your money for any specific length of time. With a CD, the bank knows exactly when it can use your deposit and for how long.
That certainty is valuable to the bank. It can lend out your money or invest it with confidence that the funds will be there. In return, it shares some of that benefit with you through a higher rate. The tradeoff is simple: you give up flexibility, and the bank gives you better returns.
How CD rates change and what affects them
CD rates move based on two main forces. The first is the Federal Funds Rate—the interest rate the Federal Reserve sets for banks to lend to each other. When the Fed raises this rate, banks typically raise CD rates too. When the Fed cuts rates, CD rates usually fall. This happens because banks' own costs change, and they adjust what they pay depositors accordingly.
The second force is competition between banks. If one bank raises its CD rates to attract more deposits, others may follow. If a bank has plenty of deposits already, it might lower its rates. You will see different rates at different banks on the same day, and those differences can be meaningful—a 4.75% CD at one bank versus 5.25% at another makes a real difference over time.
CD rates also vary by term length. A three-month CD will almost always pay less than a two-year CD at the same bank on the same day. This is because longer commitments carry more risk for you (you cannot access your money) and more opportunity for the bank (it can use your money longer).
What you earn from a CD rate
The interest you earn is calculated on your deposit amount and the rate offered. If you put $10,000 into a one-year CD at 5%, you will earn $500 in interest over that year (before taxes). The bank adds that interest to your account, and when the CD matures, you withdraw the full $10,500.
Some CDs compound interest—meaning interest earned gets added to your balance, and then you earn interest on that interest too. Others pay interest in a lump sum at maturity. The difference is usually small for shorter terms but becomes more noticeable over longer periods. When comparing CDs, check whether interest compounds and how often.
You will owe taxes on the interest you earn. The bank will send you a 1099-INT form at tax time showing how much interest the CD paid. That amount counts as taxable income, even though you did not withdraw it yet.
The penalty for withdrawing early
If you need your money before the CD matures, you can withdraw it—but the bank will charge you a early withdrawal penalty. This penalty is usually a certain number of months of interest. A CD might have a penalty of three months of interest, meaning if you withdraw early, the bank keeps three months' worth of what you would have earned.
On a $10,000 CD at 5% with a three-month penalty, breaking it after six months would cost you $125 in lost interest (three months of the $500 annual interest). You would still get your $10,000 back, but your net gain would be $125 instead of $250.
Some banks offer no-penalty CDs that let you withdraw without a fee, but these come with lower rates to compensate. The tradeoff is real: more flexibility means less interest.
How to compare CD rates across banks
CD rates change daily, so the rate you see today may not be available tomorrow. When you are ready to open a CD, check multiple banks—online banks, credit unions, and traditional banks all offer them, and rates differ significantly. A difference of 0.5% might seem small, but on a $25,000 CD over two years, it adds up to $250 in extra earnings.
When comparing, look at the rate, the term length, how often interest compounds, and the early withdrawal penalty. Some banks also offer CD ladders or bump-up CDs that let you adjust your strategy if rates rise. Read the fine print on each bank's CD terms before committing.
The CD rate you lock in is only available at that moment. Once you open the CD, that rate is yours for the full term, regardless of what happens to other rates.
CD rates versus other savings options
CDs typically pay more than regular savings accounts but less than some other investments. A high-yield savings account might pay 4.5% with no lock-in period, while a five-year CD might pay 5.3%. The CD pays more, but you cannot touch the money. Money market accounts fall somewhere in between—they pay more than basic savings but usually less than CDs, and they offer limited withdrawal flexibility.
If you have money you will not need for a specific time period, a CD usually makes sense. If you might need the money sooner, a high-yield savings account keeps your options open. The choice depends on your timeline and how much you value access to your funds.
Frequently Asked Questions
Can a bank change my CD rate after I open it?
No. Once you open a CD and lock in a rate, that rate is fixed for the entire term. The bank cannot lower it or raise it. If rates drop the next day, you keep your original rate. If rates spike, you are locked into the lower rate you agreed to.
What happens when my CD matures?
When the term ends, your CD matures. You receive your original deposit plus all interest earned. Most banks then give you a grace period (usually 7 to 10 days) to decide what to do next—withdraw the money, open a new CD, or move it to another account. If you do nothing, many banks automatically renew the CD at the current rate.
Is the interest I earn on a CD taxed?
Yes. Interest earned on a CD counts as taxable income in the year it is earned, even if you do not withdraw it. The bank sends you a 1099-INT form at tax time. You report this on your tax return. If the CD is in a tax-advantaged account like an IRA, the interest may not be taxed until you withdraw.
Why would I choose a CD if I can get almost the same rate in a savings account?
Sometimes you cannot—high-yield savings accounts at some banks pay rates very close to CD rates. The main reason to choose a CD is if you want to lock in a rate and know you will not need the money. A CD also removes the temptation to spend the money, since accessing it early costs you.
Do all banks offer the same CD rates?
No. Rates vary by bank and change daily. Online banks often pay higher rates than brick-and-mortar banks because they have lower overhead costs. Credit unions may offer competitive rates to members. Checking multiple banks before opening a CD can mean hundreds of dollars in difference over the term.