CD interest rates are set by each bank or credit union and change based on what the Federal Reserve does with its benchmark rate

A CD interest rate is the percentage of your money that a bank or credit union will pay you for letting them hold it for a set period. When you open a CD, you agree to leave your money untouched until a specific date — called the maturity date. In exchange, the institution locks in an interest rate and pays you that rate for the entire term, whether rates go up or down in the meantime.

The rate you see advertised is what you will actually earn. If a bank offers 4.75% APY on a one-year CD and you deposit $5,000, you will earn roughly $237.50 in interest over that year (the exact amount depends on how the bank compounds interest, but APY already accounts for that). That rate does not change, even if the bank raises its rates next month.

Banks set their own rates based on what the Federal Reserve's benchmark interest rate is doing. When the Fed raises its rate, banks typically raise CD rates within days or weeks. When the Fed cuts its rate, CD rates fall. The lag between a Fed move and a bank's response varies — some institutions move immediately, others wait to see if the change will stick.

Key Takeaways

  • CD rates are locked in when you open the account and do not change, even if the bank raises or lowers rates later.
  • Longer-term CDs (like 5-year terms) usually pay higher rates than shorter ones (like 3-month terms), because you are committing your money for longer.
  • Banks and credit unions set their own rates independently, so the same CD term can pay 4.5% at one institution and 5.2% at another.
  • CD rates move when the Federal Reserve changes its benchmark rate, though the timing and size of each bank's response varies.
  • The rate shown as APY (Annual Percentage Yield) already includes the effect of compounding, so it is the true annual return you will earn.

Why rates differ between banks and terms

Two banks offering the same CD term — say, a one-year CD — may post different rates because they have different funding needs and different strategies. A bank that needs deposits urgently may offer a higher rate to attract money. A bank with plenty of deposits may offer a lower rate because it does not need to compete as hard. Credit unions often pay slightly higher rates than large national banks because they are member-owned and return profits to members rather than shareholders.

The term length also drives the rate. A three-month CD typically pays less than a one-year CD at the same bank, and a one-year CD pays less than a five-year CD. This is because you are giving the bank the use of your money for longer, and the bank is willing to pay more for that certainty. The difference between a short-term and long-term rate is called the yield curve, and it shifts depending on what the Fed is expected to do.

Right now, the yield curve is relatively flat or even inverted in some places, meaning short-term and long-term rates are close to each other. This happens when the market expects rates to fall in the future. When the curve is steep — long-term rates much higher than short-term rates — it signals confidence that rates will stay high or rise further.

How the Federal Reserve affects CD rates

The Federal Reserve does not set CD rates directly. Instead, it sets the federal funds rate, which is the interest rate that banks charge each other for overnight loans. This rate influences everything else in the economy, including what banks pay on savings accounts, money market accounts, and CDs.

When the Fed raises its rate, banks earn more on their own operations and have more room to pay depositors higher rates. When the Fed cuts its rate, banks' earnings shrink and they typically lower what they pay you. The relationship is not one-to-one — a 0.25% Fed rate cut does not always mean your CD rate drops by exactly 0.25% — but the direction is consistent.

The Fed meets eight times a year to decide on rate changes. You can watch the Fed's calendar and statements to get a sense of whether rates are likely to rise, fall, or hold steady. This information helps you decide whether to lock in a rate now or wait to see if rates improve.

The difference between APY and interest rate

Banks show CD rates in two ways: as a simple interest rate and as APY (Annual Percentage Yield). The APY is the number that matters because it includes the effect of compounding — the way interest earned gets added back to your balance and then earns interest itself.

For example, a CD might list a 4.50% interest rate compounded daily. The APY would be slightly higher, perhaps 4.60%, because of that daily compounding. When you compare CDs across banks, always compare the APY, not the stated rate. The APY is the true annual return you will receive.

What happens to your rate when the CD matures

When your CD reaches its maturity date, the bank will either return your principal plus interest to you, or automatically renew the CD at the bank's current rate for the same term. Most banks renew automatically unless you tell them not to. This is important: the new rate will almost certainly be different from your original rate, because market conditions have changed.

If rates have fallen, your renewal rate will be lower. If rates have risen, your renewal rate will be higher. You have a grace period — usually 7 to 10 days after maturity — to withdraw your money without penalty or to shop around for a better rate elsewhere. If you do nothing during that window, the renewal happens automatically at whatever rate the bank is offering that day.

How to find the best CD rate for your situation

The best rate for you depends on how long you can lock your money away and what you expect rates to do. If you think rates will fall, locking in a longer-term CD now protects you. If you think rates will rise, a shorter-term CD lets you reinvest at a higher rate sooner. If you are unsure, a CD ladder — splitting your money across multiple CDs with different maturity dates — lets you benefit from both scenarios.

Online banks and credit unions typically offer higher rates than brick-and-mortar banks because they have lower overhead costs. Checking a few institutions takes 15 minutes and can mean the difference between 4.5% and 5.2% on your money. That difference compounds significantly over time, especially on larger deposits.

Watch out for promotional rates. Some banks offer a higher rate for the first CD you open with them, then revert to lower rates for renewals or additional CDs. Read the fine print to understand whether the rate applies to your specific situation.

Penalties for withdrawing early

If you need your money before the maturity date, the bank will charge you an early withdrawal penalty. This 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 would have earned. On a $10,000 CD earning 5% APY, that is roughly $125.

Some banks offer no-penalty CDs, which let you withdraw your money early without losing interest. These CDs typically pay a lower rate than standard CDs because the bank is taking on more risk. Whether a no-penalty CD makes sense depends on whether you might need the money and whether the rate difference is worth it to you.

Frequently Asked Questions

Do CD rates change after I open the account?

No. Once you open a CD, your rate is locked in for the entire term. If the bank raises rates the next day, you still earn your original rate. If rates fall, you are protected. The only time your rate changes is when the CD matures and you renew it.

Why is a five-year CD rate higher than a one-year CD rate?

Banks pay more for longer commitments because they want certainty about how long they can use your money. A five-year CD gives the bank five years to lend out your deposit and earn returns. A one-year CD gives them only one year. The extra rate is compensation for tying up your money longer.

What is the difference between a CD and a savings account?

A savings account has no maturity date and lets you withdraw money anytime, but it pays a lower interest rate. A CD locks your money away for a set term and pays a higher rate in exchange. If you withdraw early from a CD, you pay a penalty; savings accounts have no penalty.

Can I shop around for better rates before my CD matures?

Yes. During the grace period after your CD matures (usually 7 to 10 days), you can withdraw your money without penalty and move it to a different bank offering a better rate. Mark your maturity date on your calendar so you do not miss this window.

How often do banks change their CD rates?

Banks can change their advertised rates daily, but your locked-in rate never changes until maturity. Banks typically adjust rates within days or weeks of a Federal Reserve decision, though the timing varies by institution.