A certificate of deposit 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 sum of money—anywhere from $500 to $100,000 or more—and they promise to pay you back that amount plus interest after a fixed period, usually three months to five years. The catch is that you cannot withdraw the money before that time ends without paying a penalty, typically a few months' worth of interest.

CDs are different from regular savings accounts because the interest rate is locked in and usually higher. A savings account might pay 0.01% annual interest; a CD might pay 4% to 5%, depending on how long you lock your money away and what the bank is offering that month. The longer you agree to leave the money untouched, the higher the rate tends to be.

Key Takeaways

  • You deposit a lump sum and cannot touch it until the CD matures without paying an early withdrawal penalty.
  • CDs offer higher interest rates than savings accounts because the bank knows exactly when it will have access to your money.
  • The maturity date ranges from three months to five years or longer, and you choose the length when you open the account.
  • When a CD matures, you receive your original deposit plus all the interest earned, and you can then withdraw it or roll it into a new CD.
  • CDs are insured by the FDIC (at banks) or NCUA (at credit unions) up to $250,000 per account, so your money is protected even if the institution fails.

How the maturity date and interest rate work together

When you open a CD, you choose how long to lock up your money. Common terms are three months, six months, one year, two years, three years, and five years. The bank tells you the interest rate for that specific term before you commit. If you choose a three-month CD at 4.5% annual interest, you will earn roughly 1.125% over those three months (the annual rate divided by four), and then the CD matures and you can access your money.

The interest is usually compounded daily or monthly, meaning interest earned gets added to your balance, and then you earn interest on that interest too. By the time the CD matures, you will have your original deposit plus all the accumulated interest in one lump sum. You do not receive monthly payments; you get everything at once when the term ends.

What happens when your CD matures

On the maturity date, your CD stops earning interest and the funds become available to withdraw without penalty. Most banks give you a grace period—usually seven to ten days—during which you can decide what to do next. If you do nothing, many banks automatically roll the money into a new CD at the current rate for the same term length, though you can call and stop this if you prefer.

You can also withdraw the full amount, move it to a different bank, or split it between a withdrawal and a new CD. Some people use CDs as a savings ladder: they open five one-year CDs at different times so that one matures every few months, giving them regular access to chunks of money without losing the higher interest rate on the rest.

The early withdrawal penalty and when it applies

If you need the money before the maturity date, the bank will let you withdraw it, but you will pay a penalty. The penalty is usually expressed as a number of months of interest—for example, three months' interest or six months' interest. On a $10,000 CD earning 4.5% annually, three months of interest is about $112.50, so that is what you would lose if you withdrew early.

The penalty varies by bank and by the CD term. Longer-term CDs usually have larger penalties. Some banks offer "no-penalty CDs" that let you withdraw early without a fee, but these come with lower interest rates to compensate. Before you open a CD, read the terms carefully so you know exactly what the penalty is and whether you can afford to pay it if an emergency comes up.

Why banks offer CDs and why you might choose one

Banks use CDs to raise money they can lend out or invest. When you lock your money away for a set time, the bank knows it can use that cash for the full term, which makes it more valuable to them than money in a regular savings account that could leave at any moment. That certainty is why they pay you more interest.

You might choose a CD if you have money you will not need for a specific period—for example, a down payment you are saving for a house purchase two years from now, or an emergency fund you want to earn more on while keeping it safe. CDs are also useful if you want to avoid the temptation to spend money, since the penalty makes withdrawal inconvenient. However, if you think you might need the money sooner, a regular savings account is safer because you can withdraw without cost.

FDIC and NCUA insurance protection

CDs held at banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per bank. CDs at credit unions are insured by the National Credit Union Administration (NCUA) up to the same amount. This means if the bank or credit union fails, you will get your money back up to that limit, even if the institution goes out of business.

If you have more than $250,000 to invest in CDs, you can spread it across multiple banks to keep everything insured. For example, you could open a $250,000 CD at Bank A and another at Bank B, and both would be fully protected. The insurance covers the principal plus any interest earned, so you are protected on the full amount.

CD rates and how to compare them

CD rates change constantly based on what the Federal Reserve does with interest rates and what banks decide to offer. When the Fed raises rates, banks typically raise CD rates too. When the Fed cuts rates, CD rates fall. You can compare rates across banks using websites that list current CD offerings, or you can call banks directly and ask what they are paying for the term length you want.

A CD at a large national bank might pay 4.0% for a one-year term, while an online bank might pay 4.8% for the same term. The difference adds up: on a $10,000 CD, that 0.8% difference means $80 more in interest over the year. Online banks often pay more because they have lower overhead costs. Before you open a CD, check at least three or four institutions to see what rates are available.

Frequently Asked Questions

Can I withdraw money from a CD before it matures?

Yes, but you will pay an early withdrawal penalty, usually a few months of interest. The exact penalty depends on the bank and the CD term. Some banks offer no-penalty CDs with lower rates that let you withdraw without a fee. Check the terms before you open the account so you know what the penalty is.

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

A savings account lets you withdraw money anytime without penalty, but it pays very low interest, often less than 0.1% annually. A CD locks your money for a set time and pays much higher interest—currently 4% to 5%—but charges a penalty if you withdraw early. Choose a CD if you will not need the money for several months or longer.

What happens to my CD when it matures?

Your CD stops earning interest on the maturity date, and the money becomes available to withdraw. Most banks give you a grace period of seven to ten days to decide what to do. If you do nothing, many banks automatically roll the money into a new CD at the current rate. You can also withdraw it, move it to another bank, or split it between options.

Are CDs safe if the bank fails?

Yes. CDs at banks are insured by the FDIC up to $250,000, and CDs at credit unions are insured by the NCUA up to the same amount. If the institution fails, you will get your full deposit plus interest back, up to the insurance limit. You can spread money across multiple banks to insure more than $250,000.

How much money do I need to open a CD?

Most banks require a minimum deposit to open a CD, typically $500 to $2,500, though some online banks have lower minimums or none at all. The minimum varies by bank and sometimes by the CD term. Call or check the bank's website to find out what the minimum is for the CD you are interested in.