A certificate of deposit is a savings account that locks your money away for a set time in exchange for a higher interest rate

A certificate of deposit (CD) is an agreement between you and a bank or credit union. You give them a lump sum of money, they promise to hold it untouched for a specific period — anywhere from three months to five years — and in return they pay you a fixed interest rate that is almost always higher than what a regular savings account offers. When the time period ends, you get your original money back plus the interest earned.

The trade-off is straightforward: you cannot touch the money without a penalty. If you withdraw before the maturity date, the bank charges a fee that typically eats into your interest earnings or reduces your principal. This restriction is what makes the bank willing to pay you more. They know your money will stay put, so they can lend it out with confidence.

CDs are insured by the Federal Deposit Insurance Corporation (FDIC) if held at a bank, or by the National Credit Union Administration (NCUA) if held at a credit union. That means up to $250,000 of your deposit is protected if the institution fails — a safety feature that makes CDs one of the lowest-risk ways to save.

Key Takeaways

  • A CD locks your money for a set term (three months to five years) in exchange for a fixed interest rate higher than regular savings accounts.
  • Withdrawing early triggers a penalty that reduces your earnings or principal, so CDs work best for money you will not need during the term.
  • Interest rates on CDs vary by bank, credit union, and term length, so comparing offers before you commit is worth the time.
  • Your deposit is insured up to $250,000 by the FDIC or NCUA, making CDs a low-risk savings tool.
  • You can open a CD with as little as $500 at many institutions, though some require $1,000 or more.

How the interest rate and term length work together

The interest rate a bank offers on a CD depends on two things: how long you lock your money away and what the broader interest rate environment looks like. Longer terms usually come with higher rates because the bank wants to compensate you for tying up your cash for years instead of months. A one-year CD might pay 4.5 percent, while a five-year CD at the same bank might pay 5.2 percent.

The rate is fixed, meaning it does not change. If you open a two-year CD at 4.8 percent, you will earn 4.8 percent for the full two years, even if rates drop to 3 percent next month or climb to 6 percent. This predictability is one reason people choose CDs — you know exactly what you will have at the end.

Interest rates across all banks shift based on what the Federal Reserve does with its benchmark rate. When the Fed raises rates, new CDs pay more. When the Fed cuts rates, new CDs pay less. If you locked in a high rate before a rate cut, you have made a good move. If you lock in a low rate before a rate increase, you have missed out — but you cannot change it mid-term without paying the early withdrawal penalty.

When an early withdrawal penalty applies and what it costs

The early withdrawal penalty is the price you pay for breaking the CD agreement. The amount varies by bank and by how long the CD term is. A three-month CD might charge a penalty equal to one month of interest. A five-year CD might charge a penalty equal to six months of interest or more. Some banks state the penalty as a flat dollar amount instead.

Here is a concrete example: you open a one-year CD with $10,000 at 4.5 percent interest. After six months, you need the money and withdraw it. The bank might charge a penalty of three months of interest — about $112.50 — and give you $9,887.50. You still came out ahead of a regular savings account, but you did not earn what you would have if you had waited the full year.

Some banks offer "no-penalty CDs" that let you withdraw without a fee, but they pay a lower interest rate in exchange. The trade-off is real: lower may provide rate versus the flexibility to access your money. Read the fine print before opening any CD, because penalty terms are not always obvious.

Comparing CD rates across banks and credit unions

Interest rates on CDs vary significantly from one institution to the next, even for the same term. A large national bank might offer 4.2 percent on a one-year CD while an online bank offers 4.9 percent for the same term. Over a year, that 0.7 percent difference adds up — on a $10,000 deposit, it means $70 more in your pocket.

Online banks and credit unions often pay higher rates than brick-and-mortar banks because they have lower overhead costs. You sacrifice the ability to walk into a branch, but if you are comfortable managing your account online or by phone, the higher rate is worth it. Websites that aggregate CD rates from multiple institutions make it straightforward to see what is available in your area and online.

When comparing, pay attention to the term length, the rate, and the minimum deposit required. A bank might offer a great rate but require $25,000 to open the CD, which rules it out if you only have $5,000. Also check whether the rate is promotional (available for a limited time to new customers) or standard (available to anyone, anytime).

What happens when your CD matures

When the term ends, your CD reaches maturity. The bank sends you a notice a few weeks before, telling you what happens next. You have a choice window — usually 7 to 10 days — to decide what to do with your money.

You can withdraw the full amount (principal plus interest) and move it elsewhere. You can open a new CD at the same bank, either for the same term or a different one. Or you can let the bank automatically renew the CD for another term at whatever the current rate is. If you do nothing and the bank auto-renews, you are locked in again for the full term at the new rate, which might be higher or lower than what you had.

Many people miss the maturity window and accidentally let their CD renew at a worse rate. Set a calendar reminder a month before maturity so you have time to shop around and decide whether to stay or move your money to a better offer.

CDs versus other savings options

A regular savings account is liquid — you can withdraw whenever you want — but it pays almost nothing. A money market account pays more than savings but less than a CD, and it usually requires a higher minimum balance. A CD pays the most but locks your money away.

If you have money you will not need for at least a year, a CD almost always beats a savings account. If you might need the money sooner, the early withdrawal penalty could wipe out your gains, so a savings account or money market account makes more sense. If you are saving for something specific with a known date — a down payment in three years, a wedding in two years — a CD with a matching term is an efficient choice.

Bonds and stocks can pay more over time, but they carry risk and require more knowledge to manage. CDs are for people who want a may provide return with no guesswork.

How much you need to open a CD and where to open one

Most banks and credit unions let you open a CD with $500 to $1,000. Some online banks go as low as $100 or $250. A few require $25,000 or more, but those are the exception. Check the specific institution's requirements before you explore.

You can open a CD at any bank or credit union, whether you have an existing account there or not. Online banks often have the highest rates and lowest minimums. Credit unions sometimes offer competitive rates to members. Large national banks are convenient if you want in-person service, but they rarely offer the best rates.

You can also open a CD through a brokerage account, which gives you access to CDs from many banks in one place. This is useful if you want to compare and manage multiple CDs without logging into different websites.

Frequently Asked Questions

Can I open multiple CDs at the same bank?

Yes. You can open as many CDs as you want at the same institution. Some people open several CDs with different maturity dates so that one matures every year, creating a "CD ladder." This way you get the higher rates of longer-term CDs while still having access to some of your money regularly.

What if interest rates go up after I open my CD?

You are locked into your rate for the full term. If rates rise, you will earn less than you could have if you had waited. This is the downside of CDs — you cannot benefit from rate increases. You can only take advantage of higher rates when your current CD matures and you open a new one.

Is my money safe in a CD?

Yes, up to $250,000 per account at each institution. The FDIC (for banks) and NCUA (for credit unions) insure your deposit even if the bank fails. If you have more than $250,000, you can open CDs at multiple institutions to stay fully covered.

Can I use a CD as collateral for a loan?

Yes. Some banks let you borrow against your CD at a lower interest rate than an unsecured loan. You keep the CD and the interest it earns, but the bank holds it as security. This is useful if you need cash without triggering the early withdrawal penalty.

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

A savings account is liquid and flexible but pays very little interest. A CD locks your money for a set term and pays significantly more interest. Choose a savings account if you need access to your money. Choose a CD if you can afford to leave the money untouched for months or years.