CD rates are the interest percentages banks pay you for locking your money away for a set time
A CD rate is the annual percentage you earn when you deposit money into a certificate of deposit. The bank pays you this rate in exchange for agreeing not to touch that money until a specific date — usually three months, six months, one year, or five years from now. The longer you lock your money away, the higher the rate typically is.
The rate you see advertised is what the bank will pay you on that money for the full term. If a bank offers a 4.50% rate on a one-year CD and you deposit $1,000, you will earn interest at that rate for twelve months. When the CD matures — when that year ends — you get your original $1,000 back plus the interest earned.
CD rates change constantly because banks set them based on what the Federal Reserve does with interest rates. When the Fed raises rates, banks usually raise CD rates to attract deposits. When the Fed lowers rates, CD rates fall. This means the rate you see today may be different from the rate next week.
Key Takeaways
- CD rates are annual percentages that vary by bank, by how long you lock your money away, and by how much you deposit.
- Longer CD terms almost always pay higher rates than shorter ones at the same bank.
- Banks set their rates based on Federal Reserve decisions, so rates change weekly or even daily.
- The rate you lock in when you open the CD stays the same for the entire term, even if rates rise or fall later.
- You can compare rates across banks because they are published publicly and updated frequently.
Why rates differ between banks and CD lengths
Not all banks pay the same rate on the same CD term. A one-year CD at Bank A might pay 4.25% while Bank B pays 4.75% for the identical product. The difference comes down to how much money each bank needs right now and how much they are willing to pay to get it.
Banks also pay different rates based on how long you agree to lock your money away. A three-month CD almost always pays less than a one-year CD at the same bank. A five-year CD usually pays more than a one-year CD. This is because the bank wants to keep your money longer and is willing to pay you more for that commitment.
Some banks also offer higher rates if you deposit a larger amount — say $25,000 instead of $1,000. These are called jumbo CDs. Not every bank offers them, and the threshold varies. Online banks tend to offer the same rate regardless of deposit size, while some brick-and-mortar banks have tiered rates.
How the Federal Reserve affects CD rates
The Federal Reserve sets a target range for the federal funds rate — the rate at which banks lend money to each other overnight. This is not a rate you see directly, but it influences everything else. When the Fed raises this rate, banks have less incentive to pay you high rates on CDs because they can earn money other ways. When the Fed lowers rates, banks compete harder for your deposits and offer higher CD rates.
The Fed does not set CD rates directly. Each bank decides its own rates. But because all banks watch the Fed's moves, CD rates across the industry tend to move in the same direction at roughly the same time. If the Fed raises rates on a Wednesday, you may see CD rates tick up by Thursday or Friday at most banks.
This is why CD rates are higher at some times of year than others. During periods when the Fed is raising rates, CD rates climb. During periods when the Fed is cutting rates, CD rates fall. A CD rate of 5.00% today might be 3.50% six months from now if the Fed cuts rates in between.
The difference between advertised rates and what you actually earn
The rate a bank advertises is called the annual percentage yield, or APY. This is the actual return you will earn in one year, including the effect of compounding — when the bank adds interest to your balance and then pays you interest on that interest.
Some banks also list the annual percentage rate, or APR. For CDs, APY is the number that matters because it shows your real earnings. APY is always equal to or higher than APR on a CD because of compounding. If a bank only shows you APR, ask for the APY so you can compare fairly with other banks.
The rate is locked in when you open the CD. If rates rise after you open it, your rate does not change. If rates fall, your rate stays the same — you are protected. This is why locking in a rate during a high-rate environment can be valuable.
How to find and compare current CD rates
CD rates are public information. Banks publish them on their websites, and financial websites like Bankrate, DepositAccounts, and the FDIC's BankFind tool let you search rates across multiple banks at once. These sites update rates daily or multiple times per day, so you can see how rates are moving.
When you compare, make sure you are looking at the same CD term at each bank — a one-year CD at Bank A should be compared to a one-year CD at Bank B, not a six-month CD. Also check the minimum deposit required, because some banks require $500 and others require $25,000.
Online banks typically offer higher CD rates than brick-and-mortar banks because they have lower overhead costs. If you are comfortable banking online and do not need in-person service, online banks are usually worth checking first.
What happens when your CD matures
When your CD reaches its maturity date, the bank will either automatically renew it into a new CD at the current rate, or deposit the money into a regular savings or checking account. Check your CD agreement to see which your bank does by default. Most banks give you a grace period — usually seven to ten days — to decide what to do before they act automatically.
If rates have risen since you opened your CD, you may want to shop around and move your money to a higher-paying CD at another bank. If rates have fallen, your old CD rate may look attractive compared to what is available now. Either way, you have a choice at maturity.
If you withdraw money from a CD before it matures, you will pay an early withdrawal penalty. This penalty varies by bank and by CD term — a longer-term CD usually has a larger penalty. The penalty is deducted from your interest earnings or from your principal if there is not enough interest. Always read the penalty terms before you open a CD.
Why CD rates matter for your savings plan
CD rates determine how much your money will grow over time. A $10,000 CD at 4.50% for one year will earn roughly $450 in interest. The same $10,000 at 2.50% will earn roughly $250. That $200 difference is real money, and it comes from choosing a bank with a higher rate.
Because rates change, the timing of when you open a CD can affect your return. If you open a CD when rates are near their peak, you lock in a high rate for the entire term. If you open one when rates are falling, you may regret not waiting. There is no way to predict the future, but you can watch rate trends and make a decision based on where you think rates are headed.
Many people use a CD ladder — opening multiple CDs with different maturity dates so that some money matures every few months. This way, if rates rise, you can reinvest the maturing CDs at the new higher rates without waiting years for all your money to become available.
Frequently Asked Questions
Can a bank change my CD rate before it matures?
No. Once you open a CD, the rate is locked in for the entire term. The bank cannot lower it, and you do not benefit if rates rise. This protection is one of the main reasons people use CDs — the rate is may provide.
Why do longer CDs pay more than shorter ones?
Banks pay more for longer terms because they want to keep your money for a longer period. In exchange for tying up your money for five years instead of one year, the bank pays you a higher rate. You are compensated for giving up access to your cash.
Do I have to pay taxes on CD interest?
Yes. CD interest is taxable income in the year you earn it. The bank will send you a 1099-INT form at tax time showing how much interest you earned. You report this on your tax return just like any other interest income.
What is the difference between a CD rate and a savings account rate?
CD rates are usually higher because you agree not to touch the money for a set time. Savings accounts let you withdraw anytime, so banks pay less interest. The trade-off is flexibility versus a higher return.
If rates drop after I open a CD, can I move my money to a different bank?
You can, but you will pay an early withdrawal penalty. Whether it makes sense depends on how much higher the new rate is and how much the penalty costs. Sometimes the penalty eats up the benefit of the higher rate, so do the math first.