Certificate of Deposit rates are the interest percentages banks and credit unions pay you for locking your money away for a set time period

A certificate of deposit (CD) rate is the annual interest rate a financial institution offers you in exchange for depositing money and agreeing not to touch it until a specific date. When you open a CD, you choose a term — typically anywhere from three months to five years — and the bank locks in a rate for that entire period. That rate is what you earn on your deposit, paid either monthly, quarterly, or at maturity depending on the CD.

The rate you see advertised is called the annual percentage yield (APY), which includes the effect of compounding. This matters because it shows you the real return you'll get, not just the stated interest rate. A CD paying 4.50% APY will earn you more than one paying 4.50% simple interest, because the interest gets added to your balance and then earns interest itself.

CD rates change constantly based on what the Federal Reserve does with its benchmark interest rate. When the Fed raises rates, banks typically raise CD rates within days or weeks. When the Fed cuts rates, CD rates fall. This is why the same bank might offer 5.00% APY one month and 4.75% APY the next.

Key Takeaways

  • CD rates are locked in when you open the account and do not change, even if market rates rise or fall during your term.
  • The APY shown is the actual annual return you will earn, including the effect of compounding interest.
  • Rates vary by term length, bank, and current Federal Reserve policy — a one-year CD at one bank may pay 4.25% while another pays 4.50%.
  • You can lose money if you withdraw before maturity because most banks charge an early withdrawal penalty that eats into your earnings.

How rates differ by CD term length

Banks offer different rates for different term lengths, and the pattern usually follows what's called the yield curve. In normal times, longer-term CDs pay higher rates than shorter ones because you're locking your money away for more years. A three-month CD might pay 4.00% APY while a five-year CD at the same bank pays 5.00% APY.

Sometimes the yield curve inverts, meaning short-term rates are higher than long-term rates. This happens when the Fed is expected to cut rates in the future. In those periods, a one-year CD might pay more than a three-year CD. This is actually useful information — it can signal what banks think about the economy ahead.

The term you choose should match when you actually need the money. If you know you'll need cash in two years, a five-year CD locks you in too long and a three-month CD exposes you to rate risk when it matures and you have to roll the money into a new CD at whatever the rate is then.

Why rates vary between banks and credit unions

Two banks in the same city offering the same term length can have different CD rates. This happens because banks set their own rates based on how much deposit money they need and what they can earn by lending it out. A bank that needs deposits badly might offer 5.25% APY to attract them. A bank flush with deposits might offer 4.75% APY.

Online banks typically offer higher CD rates than brick-and-mortar banks because they have lower overhead costs. They don't pay for branch buildings or tellers, so they can pass some of that savings to depositors. A national online bank might offer 5.35% APY on a one-year CD while a local bank offers 4.50% for the same term.

Credit unions sometimes offer competitive CD rates, especially to members. Credit unions are member-owned, not shareholder-owned, so they can return earnings to members through better rates. Check your credit union's CD offerings if you belong to one — the rate might beat what banks are offering.

What happens to your rate if you break the CD early

Your CD rate stays the same for the entire term, but only if you leave the money untouched. If you withdraw before the maturity date, the bank charges an early withdrawal penalty. This penalty is usually stated as a number of months of interest — for example, "three months of interest" or "six months of interest."

The penalty comes out of your earnings first, then out of your principal if the penalty is large enough. If you have a $10,000 CD earning 4.50% APY with a six-month interest penalty, and you withdraw after four months, the bank takes six months of interest (about $225) from your account. You get back $9,775 plus the four months of interest you actually earned.

Some banks offer no-penalty CDs that let you withdraw early without a penalty, but they pay lower rates to offset that flexibility. A no-penalty CD might pay 4.00% APY while a standard CD at the same bank pays 4.75% APY. The choice depends on whether you value flexibility or a higher return.

How CD rates compare to savings accounts and money market accounts

High-yield savings accounts and money market accounts often pay rates close to CDs, with the big difference being flexibility. A high-yield savings account paying 4.50% APY lets you withdraw money anytime without penalty. A CD paying 4.75% APY locks you in, but you earn slightly more for that commitment.

The rate difference between CDs and savings accounts narrows when the Fed is cutting rates and widens when the Fed is raising rates. During periods of rising rates, banks raise CD rates faster than savings account rates because they want to lock in deposits for longer. During falling-rate periods, banks cut CD rates slower to protect existing CD holders.

If you're not sure you'll need the money, a high-yield savings account might make more sense even if the rate is slightly lower. The penalty for withdrawing from a CD can wipe out months of interest gains, so the may provide access of a savings account has real value.

Understanding APY versus stated interest rate

Banks must show you the APY, which is the rate that matters for your actual earnings. The stated interest rate (sometimes called the nominal rate) is different because it doesn't account for compounding. A CD with a 4.50% stated rate compounded monthly has an APY higher than 4.50% because each month's interest gets added to your balance and earns interest the next month.

The difference between stated rate and APY is small on short terms but meaningful on longer ones. On a $10,000 CD with a 4.50% stated rate compounded monthly over five years, the APY might be 4.60%. That extra 0.10% compounds to real money over time.

Always compare CDs using APY, not the stated rate. Federal law requires banks to display APY prominently, so you should see it right next to the rate when you're shopping for CDs.

What to watch when CD rates are falling

When the Fed cuts rates, CD rates follow within weeks. If you have a CD maturing soon and rates are falling, you face a choice: lock in a new CD at the lower rate, or move money to a savings account temporarily while you wait to see if rates stabilize. There's no perfect answer — it depends on how far you think rates will fall and how long you can wait.

Some people use a CD ladder to manage this risk. Instead of putting all your money in one five-year CD, you split it into five one-year CDs. Each year, one CD matures and you can decide whether to renew it or move the money elsewhere. This spreads out your rate risk and gives you flexibility without sacrificing much return.

If you're locking in a CD during a period of falling rates, longer terms protect you better because your rate won't change. If rates are rising, shorter terms let you get back to market sooner.

Frequently Asked Questions

Can a CD rate change after I open the account?

No. Once you open a CD, your rate is locked in for the entire term. Market rates can rise or fall, but your rate stays the same. This is the main advantage of a CD over a savings account — you know exactly what you'll earn.

What's the difference between APY and APR on a CD?

APY (annual percentage yield) is what matters for CDs. It includes compounding and shows your real annual return. APR (annual percentage rate) is used for loans and credit products. Banks must show you the APY for CDs, so use that number when comparing.

Is a higher CD rate always better?

Not if it comes with a longer term you don't need or a larger early withdrawal penalty. A CD paying 5.00% APY with a six-month penalty might be worse than one paying 4.75% with a one-month penalty if you might need the money early. Match the term to your actual timeline.

Do I pay taxes on CD interest?

Yes. CD interest is taxable income in the year you earn it, even if you don't withdraw the money. The bank will send you a 1099-INT form showing how much interest you earned. This is one reason CDs in retirement accounts (like IRAs) can be useful — the interest grows tax-deferred.

What happens when my CD matures?

The bank notifies you before maturity, usually 10 to 30 days before. You can then renew the CD at the current rate, move the money to a savings account, or withdraw it. If you don't do anything, many banks automatically renew your CD at the new current rate.