What Is A Certificate of Deposit (CD)?: Here’s what a certificate of deposit is — and everything you need to know about how to use CDs for saving and investing.

Think of certificates of deposit as interest-bearing savings accounts — with a few key differences. A certificate of deposit, or CD, is sold by financial institutions like banks, brokerage houses and credit unions.

A CD is considered a low-risk investment because CDs are generally FDIC-insured up to a high limit and because, when held to the end of the term, a CD will return the full amount of the original investment. What Is A Certificate of Deposit (CD)

Because of the way they are structured, CDs can be ideal for someone who has extra cash that he won’t need for an extended period and that he wants to use to earn more interest than he would from a money market or savings account, without having to risk the principal.

CDs differ from traditional savings accounts because a CD requires that you deposit a certain amount — typically anywhere from about $50 to $100,000 — for a certain amount of time — anywhere from 30 days to five or more years.

You’ll earn interest on your money, and the interest rate is usually fixed for the term of your CD. If you withdraw your money early, you will likely pay a penalty. What Is A Certificate of Deposit (CD) What Is A Certificate of Deposit (CD)

A number of different types of CDs are available, as well as various strategies to maximize your earnings. So before you tie up your extra cash in a CD, learn all the options to find which CD is right for you. Check out our section on the Best CD Rates.

Editor’s Note: Interested in finding the best interest bearing accounts for you? Be sure to check out our compiled list of the best bank rates!

Table of Contents

What Is A Certificate of Deposit (CD)?

Different Types of CDs at a Glance

Almost as many types of CDs exist as there are types of savers. Use this guide to help narrow your search and find the type of CD that will best suit your financial goals.

CD Type	Key Features	Considerable Factors
Traditonal CD	Pays a set amount of interest for depositing money for a set amount of time	Lacks flexibility Penalty usually assessed for early withdrawal
IRA CD	Earns interest Money only becomes taxable once withdrawn	Penalty assessed for early withdrawal
Variable-Rate CD	Pays interest based on varying rate tied to agreed-upon index, such as the prime rate or Treasury bills, among others	Because rate will vary, you can end up earning more or less than you anticipated
Fixed-Rate CD	Pays set rate of interest for entire life of the term	Examples: callable CDs, liquid CDs, brokerage CDs and traditional CDs
Jumbo CD	Requires a large investment Usually a minimum of $100,000	Pays higher interest rates than CDs of lesser value FDIC still only insures up to $250,000
Brokerage CD	Offered by a stock broker or other investment professional who acts as deposit broker for the issuing bank	Might include a flat fee or a percentage of investment amount Some brokerage CDs might be securities that are not FDIC-insured
Zero-Coupon CD	Purchased at a deep discount and pays no interest At maturity, buyer receives full face value, sometimes with a large profit	No interest or profit is paid out until maturity CD holder must pay tax on “phantom interest” accrued annually
Bump-Up CD	Allows you to “bump up” to the higher market interest rate if rates go up during the CD term	Generally, only one “bump up” is allowed Initial rate might be lower than that of a fixed-rate CD
Callable CD	Bank reserves the right to “call back” this type of CD at any time Often has a higher rate than traditional CDs	If interest rates go down, bank can terminate the CD before its term is up, paying out the principal and interest due at that point If rates go up, you do not have the option to cancel the CD before its termination date to invest at the higher rate
Liquid CD	Allows withdrawals at any time	Pays a lower interest rate than that of a non-liquid CD of the same term
Thrift CD	Offered by thrift institutions, such as credit unions and savings and loan institutions	You might need to be a member or hold another type of account with the institution
Uninsured CD	Not insured by the FDIC or by any other institution	Usually pays a higher interest rate than traditional CDs If the CD issuer goes bankrupt, you could lose your investment
No-Penalty CD	No fee charged for early withdrawal	Usually pays a lower interest rate than traditional CDs
Index-Linked CD	Connected to a specified index, such as the S&P 500 or Dow Jones indexes Return might be 100% of the index performance or another percentage, such as 90%	If the linked index declines, you run the risk of no profit You will receive your principal back
Bear CD	Pays an interest rate inverse to the agreed-upon market index If the linked index goes down, the CD earns interest	Speculative type of CD Often used as a hedge against declining stock prices
Bull CD	Pays interest at a rate linked to a rising index, such as the Dow or S&P 500	If the market enters a bear phase and declines, you will still receive a minimum rate that must be paid
Add-On CD	Lets you add money to your CD before its maturity Additional amount earns the same interest rate as the initial amount used to purchase the CD	Most add-on CDs require that you add a minimum amount, such as $500

*Term lengths, rates and minimum deposit requirements vary by institution and also depend on factors such as the federal funds rate.

Pros and Cons of CDs

CDs come with many advantages, but they also have their drawbacks. And because you probably won’t be able to withdraw your money until the end of the CD’s term without paying a hefty penalty, it’s important to know all the facts. Here are some of the pros and cons to consider. What Is A Certificate of Deposit (CD) What Is A Certificate of Deposit (CD)

Advantages of CDs: Low Risk and High Interest Rates
- CDs are insured by the FDIC up to $250,000, so you can invest knowing your money — up to that amount — is secure. Other advantages of CDs include:
  - Low risk: You can easily find CDs that are FDIC-insured up to $250,000. If you follow the terms of your CD, you can expect to get back the full amount of the original investment. What Is A Certificate of Deposit (CD)
  - Higher interest rates: CDs typically offer better interest rates than most money market, checking and traditional savings accounts.
  - Fixed rates and terms: With a fixed-rate CD, you’ll know exactly how much your money will earn over a definite period of time.
  - Straightforward investment strategy: CDs can be easy to understand and easy to use. What Is A Certificate of Deposit (CD)
  - Availability: CDs are offered at a variety of institutions.
Disadvantages of CDs: Low Liquidity and Lower Earning Potential
- Despite the ease and security of investing in a CD, there are some negative factors to consider before you decide what to do with a lump sum of your money:
  - Low liquidity: Your money will be tied up, and you will likely not be able to withdraw your money early without paying a hefty penalty.
  - Lower interest rates: CDs offer lower interest rates than other, riskier investments.
  - Lower earning potential: Long-term CDs run the risk of earning less than the rate of inflation if inflation rises.

Understanding CD Interest Rates What Is A Certificate of Deposit (CD)

When you open a CD, you are entering into an agreement with the bank or financial institution issuing it. Typically, you promise not to withdraw your money for a certain amount of time; the bank agrees to pay you a specific and fixed interest rate for that period.
For example, if you buy a one-year, $10,000 CD with an interest rate of 2% annual percentage yield compounded annually, at the end of one year your CD would be worth $10,200. What Is A Certificate of Deposit (CD)
Finding the best CD rates is a matter of searching the web and asking financial institutions about their CDs. Keep a couple things in mind: The longer the term and the more you invest, the higher the APY is likely to be. Also, your best bet for a higher APY is to search for online bank CD rates and credit union CD rates, as opposed to rates at national brick-and-mortar banks. Online banks and credit unions have lower overhead costs than national and brick-and-mortar banks; those savings are passed down to customers in the form of higher interest rates. What Is A Certificate of Deposit (CD)
A quick survey of GOBankingRates’ 10 Best CD Accounts of 2016 revealed that most of the financial institutions offered an interest rate of about 1.25% APY for a 12-month CD, as of May 2016. Alliant Credit Union offered as much as 2% APY for a 60-month CD.
Because even the best CD interest rates won’t make you rich quickly, you might want to take advantage of ways to maximize your CD earnings. Strategies include CD laddering, promotional rates, variable-rate CDs, liquid CDs and bump-up CDs.

CD Interest Rate FAQs

Learn the answers to the most frequently asked questions about CD interest rates so you can decide whether this type of investment is right for you.

What is a bump-up CD? What Is A Certificate of Deposit (CD)
- A bump-up CD or bump-rate CD is one in which you have the option to “bump up” to a newer, higher interest rate if rates rise during the life of your CD. A bump-up CD is usually limited to one increase, and your initial rate will likely be lower than that of a traditional CD of the same amount and duration.
Does my principal affect my CD rate? What Is A Certificate of Deposit (CD)
- Yes. Generally, the longer the term, the higher your interest rate. For example, in a GOBankingRates study of CD rates at CIT Bank, the top rate for a 12-month CD was 1.22% APY, whereas the top certificate of deposit rates for five-year CDs were over 2% APY, as of February 2016.
How do yield curves affect CD rates? What Is A Certificate of Deposit (CD)
- A yield curve is a graph that shows the yield of bonds of similar quality against their maturities. Usually, short-term interest rates are lower than longer-term rates. But that is not always the case. Sometimes, the yield curve steepens — the gap between rates on short-term and long-term bonds increases. The gap could mean that interest rates will rise, so you might want to limit your CD investments to short-term CDs, such as six-month CDs. What Is A Certificate of Deposit (CD)
- If the yield curve is downward-sloping, meaning rates could be expected to fall, you might choose to grab the presumed higher rate on longer CDs. But keep in mind that a yield curve is only a prediction, and the trend it indicates is not guaranteed.
What’s the difference between the CD interest rate (APR) and the CD annual percentage yield?
- The APR is the interest rate that the bank is offering on the CD. The APY tells you how much you will actually earn as your money compounds.
- For example, if you buy a 12-month, $1,000 CD with an interest rate of 1.2% APR and 1.21% APY, the CD would be worth $1,012.10 at the end of one year.

CD Fees and Costs

CDs typically come with significant penalties for early withdrawal. Common penalty amounts are six months’ worth of interest on a five-year CD, with some banks charging 12 months’ worth of interest, for example. In some instances, the penalties can even dig into your principal, meaning you would lose money for withdrawing early.
Other potential costs associated with CDs are fees. For example, brokered CDs, which are offered through a stock broker or other investment professional, sometimes require fees like a flat fee or a percentage of the amount you are investing. So before you lock your money in, make sure the interest rate is worth it.

Finding a CD That’s Right for You

When shopping for CDs, you’ll want to factor in more than just the interest rate. Before you open a CD, make sure it’s the right one for you by first answering a few important questions:

When will you need this money? Most CDs come with heavy penalties for early withdrawal, so don’t let a higher rate seduce you into tying up money you might need soon. If there’s a chance you’ll need the money, choose a shorter term or a CD without a penalty for early withdrawal. What Is A Certificate of Deposit (CD)
Do you have an emergency fund? Make sure you aren’t using emergency funds for the CD. If you find yourself in a real emergency without dedicated emergency funds, you might end up resorting to using a credit card for your immediate expenses — and losing money by carrying a balance or having to take a cash advance.
Does the CD automatically roll over? If the answer is yes, make sure you take actions to remind yourself of the date your CD matures. If you forget, the bank will roll the CD over automatically, and you won’t be able to access your money for another entire term.
Do you think interest rates will rise or fall? The vast majority of CDs feature a fixed interest rate for the life of the term. So, if you believe rates will rise in the future, perhaps you should accept a shorter term — and likely, a slightly lower interest rate — so you can renew to a higher rate later. What Is A Certificate of Deposit (CD)
Can you accept loss on inflation? If you are investing in a long-term CD, remember that there’s always a chance that inflation outpaces your interest. At that point, you’re actually losing buying power. Decide whether you are comfortable with that risk before proceeding with a CD. What Is A Certificate of Deposit (CD)

How to Open a CD Account

A few minimal requirements must be fulfilled to open a CD account. For example, for most CDs, you’ll need to be at least 18 years old or have a co-signer, and you’ll need to provide some form of ID. Here’s a breakdown of the typical steps involved in opening a CD:
- Research banks, credit unions and other financial institutions to find the best interest rate. What Is A Certificate of Deposit (CD)
- Once you’ve selected a CD, make sure you have access to the full amount you want to invest. What Is A Certificate of Deposit (CD)
- Provide at least one type of proof of ID, such as a driver license.
- Provide proof of a verified checking account.
- Fill out and submit bank forms with your personal information.
- Transfer your investment amount — by check, cash deposit, or electronic or wire transfer — into the the CD account.
- Once you’ve completed these steps, the bank will issue you CD documents with the amount, interest rate, APY, maturity date and other vital information. To avoid automatic renewal of the CD after it matures, set a reminder for the CD’s maturity date.

CD Laddering

If you’re unsure about how long you want to tie up your money in CDs, or if you believe interest rates will climb in the future, the strategy of CD laddering might be right for you. CD laddering is a way to keep your investment somewhat liquid, and can result in higher growth rates.

To create a CD ladder, simply divide up your total investment into smaller sums, buying CDs of varying lengths. For example, instead of buying one CD worth $30,000, you might buy three $10,000 CDs — one each at six-, 12- and 18-month terms. By doing this, one-third of your money becomes liquid every six months.

When one CD matures, you can either use the cash for something else or reinvest it in another 18-month CD, keeping the ladder strategy going. In addition to added liquidity, this strategy also allows you to maximize interest rates since upon the second round, you are always investing in longer-term CDs. What Is A Certificate of Deposit (CD)

You can do this in any combination, and any term. If liquidity is of utmost importance, use shorter maturities, such as three-month terms. For less liquidity but higher rates, go to intervals of one year or higher. What Is A Certificate of Deposit (CD)

Laddering-Related CD Strategies
- You can use a few laddering-related CD strategies that help combine greater liquidity with greater interest rates. One of these strategies is a CD barbell: You put half your investment into short-term CDs and half into long-term CDs. With this strategy, you’ll have some flexibility with the short-term investments and get better interest yield with the longer-term accounts. Overall, you’ll get a medium-yield average.
- Another strategy is a CD bullet, in which you buy CDs that have the same maturity date at different times. So the first year, you buy a 10-year CD, the second year you buy a nine-year CD, and so on. With the CD bullet strategy, you minimize the risk of missing out on higher interest rates by staggering your purchase dates. A CD bullet strategy could be useful for maximizing savings for a specific goal, such as college tuition or retirement.

Alternatives to CDs

CDs aren’t the only savings instrument available; many alternatives exist that might better suit your particular needs and goals. Here are a few common alternatives to CDs:

Account Type Alternative	Key Differences from CDs	When To Use
High-Yield Savings Account	Typically offers a lower interest rate than a CD Interest rate is usually variable Access money without penalty	If you need access to your money before a CD would mature
Money Market Account	Typically offers a lower interest rate than a CD Interest rate is usually variable Access money without penalty	If you need to access your funds soon
U.S. Series I Savings Bonds	Issued by the federal government Terms range 1-30 years Maximum allowable purchase of $10,000 in bonds per year Combination of fixed and variable interest rates in one bond	If you’re saving for a long-term goal, such as college or retirement
U.S. Series EE Savings Bonds	Issued by the federal government Term ranges from 1-30 years Maximum allowable purchase of $10,000 in bonds per year Fixed interest rate	If you’re saving for a long-term goal, such as college or retirement
Treasury Bills	Sold at less than face value Full value paid at a maturity date of 1 year or less	If you need your money within a year
Treasury Notes	Government-issued investments Specified interest rate paid every 6 months until maturity Issued in 2-, 3-, 5 and 10-year terms	If you want to earn a good interest rate but need your money within a decade
Treasury Bonds	Government-issued investment Specified interest rate paid every 6 months until maturity Issued in terms of more than 10 years	If you have long-term saving goals, such as retirement

CD FAQs

Take a look at some answers to FAQs on CDs to help you decide how to proceed with this type of investment. What Is A Certificate of Deposit (CD)

Should CD beneficiaries renew? What Is A Certificate of Deposit (CD)
- If you inherit a CD, the first thing to do is clarify your options with the bank where the CD is held. If you have the option to renew and you want to, check to make sure you’re getting the best possible rate. You might also consider other types of investments.
What is a CD auto-renewal? What Is A Certificate of Deposit (CD)
- When your CD is coming up for maturity, the bank will notify you. If you do not withdraw your money or inform the bank what to do with the money, the bank might reinvest your money into a new CD with similar terms. Auto-renewal deprives you of the option to shop for the highest CD rates.
How do I invest in long-term CDs without losing liquidity?
- One way to invest in long-term CDs without losing liquidity is to create a CD ladder. By using a CD ladder strategy, you divide the amount you invest in many CDs with different maturity dates, so that you are always close to the maturity date of at least some of your money.

Author’s Verdict

If you have excess funds that you won’t touch, it’s definitely a good idea to put store it in some sort of interest bearing account. A CD account would be perfect.

If you’re interested in opening a CD account, check out our Best CD Rates. Hopefully our post on What Is A Certificate of Deposit (CD)? helped you.

If you don’t have a savings account, see our best savings account section. Looking to add a little extra income each year? If so, see our list of the best bank promotions!

TD Bank Promotions: $200, $300, $500 Checking, Savings, Business Bonuses 2024

Huntington Platinum Perks Checking Bonus

Huntington Bank Bonuses & Promotions: $100, $400, $1,000 Checking Offers 2024

U.S. Bank Business Altitude Power World Elite Mastercard

U.S. Bank Promotions 2024: $400, $450, $900 Personal Checking & Business Bonuses

FEATURED BANK PROMOTIONS
PROMOTIONAL LINK	OFFER	REVIEW
HSBC Premier Checking Member FDIC	Up to $2,500 Cash	Review
Chase Private Client	$3,000 Cash	Review
U.S. Bank Business Checking	$900 Cash	Review
U.S. Bank Business Checking	$400 Cash	Review
Chase Business Complete Checking®	$300 Cash	Review
KeyBank Key Smart Checking®	$300 Cash	Review
Chase Total Checking^®	$300 Cash	Review
Chase College Checking^SM	$100 Cash	Review
J.P. Morgan Self-Directed Investing	Up to $700 Cash	Review
Chase Secure Banking^SM	$100 Cash	Review
SoFi Checking and Savings Account	$325 Cash	Review
Huntington Bank Unlimited Plus Business Checking	$1,000 Cash	Review
Huntington Bank Unlimited Business Checking	$400 Cash	Review
Huntington Bank Business Checking 100	$100 Cash	Review
Fifth Third Bank Checking	$400 Cash	Review
Axos Basic Business Checking	$400 Cash	Review
Axos Business Interest Checking	$400 Cash	Review
Axos Bank Business Premium Savings	$375 Cash	Review

Editor Rating

How to Calculate APR on a Credit Card

What Is an IRA CD?

How To Handle a Credit Card Dispute

Best Bank Promotions
	HSBC Premier Checking Up to $2,500 Cash Member FDIC
	Chase Private Client $3,000 Cash
	U.S. Bank Business Checking Earn up to $900 Subject to certain terms and limitations. Offer valid until 1/15/25. Member FDIC.
	Truist Checking $400 Cash
	Chase Business Complete Checking® $300 Cash
	J.P. Morgan Self-Directed Investing Up To $700 Cash
	Chase Total Checking® $300 Cash
	KeyBank Checking $300 Cash
	SoFi Checking and Savings Account $325 Cash
	Chase College Checking^SM $100 Cash
	Chase Secure Banking^SM $100 Cash
	Huntington Unlimited Plus Business Checking $1,000 Cash
	Huntington Unlimited Business Checking $400 Cash
	Live Oak Bank Savings $300 Cash
	Live Oak Bank Small Business Savings $200 Cash
	Axos Bank Basic Business Checking $400 Cash
	Axos Bank Business Interest Checking $400 Cash
	Axos Bank Business Premium Savings $375 Cash
	Discover® Bank Checking $360 Cashback

Credit Card Bonuses
	Chase Sapphire Preferred® 60,000 Bonus Points Learn More
	Ink Business Preferred® Credit Card 90K Bonus Points Learn More
	Ink Business Cash® Credit Card Up to $750 Bonus Cash Back Learn More
	Ink Business Unlimited^® Credit Card $750 Bonus Cash Back Learn More
	Chase Sapphire Reserve® 60,000 Bonus Points Learn More
Bonus Value is an estimated value calculated by Bankdealguy and not the card issuer.

What Is A Certificate of Deposit (CD)?