A certificate of deposit, or CD, is a type of savings account that earns a fixed interest rate for a fixed period of time. In exchange for agreeing to leave your money untouched for that period, the bank pays you a higher interest rate than a regular savings account. CDs are one of the safest ways to earn more on money you won’t need in the short term.
Quick answer: what a CD is
A CD is a time deposit — you deposit a lump sum with a bank for a set term (anywhere from a few months to several years), and the bank pays you a guaranteed, fixed interest rate for that entire period. At the end of the term (the maturity date), you get your original deposit back plus all the interest earned. CDs are FDIC-insured up to $250,000, making them essentially risk-free.
How a CD works
- You deposit a lump sum (the minimum varies by bank — often $500–$1,000, sometimes $0).
- You choose a term — common options are 3, 6, 12, 18, 24, or 60 months.
- The bank locks in an interest rate for that term.
- Your money sits in the CD, earning interest, until the maturity date.
- At maturity, you can withdraw your principal plus interest, or roll it into a new CD.
The key trade-off: you earn a guaranteed, often higher rate in exchange for agreeing not to withdraw early. If you do withdraw early, you pay an early withdrawal penalty — typically 3–6 months’ worth of interest depending on the term length.
CD terms and rates
CD terms range from very short to multi-year:
- 3–6 months — short-term; lower rates; useful for money you might need soon
- 12 months (1 year) — most popular term; often the sweet spot for rate vs. flexibility
- 24–36 months (2–3 years) — higher rates; commit your money longer
- 60 months (5 years) — highest rates; longest lockup
Rates don’t always increase linearly with term length. In some interest rate environments, short-term CDs pay nearly as much as long-term ones — or even more (an “inverted” yield curve). Always compare rates across terms before committing.
CDs vs. savings accounts vs. money market accounts
- Regular savings account — lower rate, fully liquid anytime, no term commitment
- Money market account — often higher rate than savings, limited check-writing access, no term commitment
- CD — usually highest rate of the three, but money is locked in for the term; early withdrawal incurs a penalty
CDs make the most sense when you know you won’t need the money for the term length. Savings accounts and money market accounts are better for money you might need on short notice.
CD laddering: a strategy for flexibility
One popular approach is a CD ladder: instead of putting all your money into one long-term CD, you split it across multiple CDs with staggered maturity dates. For example, you might put equal amounts into 3-month, 6-month, 12-month, and 24-month CDs. As each CD matures, you either use the money or roll it into a new CD. This gives you:
- Regular access to portions of your money as each CD matures
- Exposure to different interest rate environments (if rates rise, you reinvest maturing CDs at the new higher rate)
- Generally higher blended rate than keeping everything in a savings account
Types of CDs
Traditional CD
The standard version: fixed rate, fixed term, penalty for early withdrawal. Most common.
No-penalty CD
Allows early withdrawal without penalty. Rates are usually slightly lower than traditional CDs, but you keep the flexibility. Good for money you might need before the maturity date.
High-yield CD
Offered primarily by online banks. Often significantly higher rates than traditional banks — the same way high-yield savings accounts outperform brick-and-mortar savings accounts.
Jumbo CD
Requires a larger minimum deposit (often $100,000+) and may offer slightly higher rates. For most individual savers, high-yield CDs at online banks offer better rates without the high minimums.
FDIC insurance
CDs at FDIC-insured banks are insured up to $250,000 per depositor, per institution, per ownership category. This means your CD is essentially risk-free up to that limit — even if the bank fails, your money is protected. Credit union CDs are insured by the NCUA, which provides equivalent protection.
What to do next
If you have money you won’t need for 6–12 months (or longer), check current CD rates at online banks. Rates change frequently, so comparing a few institutions takes only a few minutes and can make a meaningful difference in what you earn. Prioritize FDIC-insured CDs with competitive APYs and manageable minimums.
Further Reading
- What Is a Money Market Account?
- What Is a Savings Account?
- Earn More on Your Savings
- What Is Compound Interest?
- Money Basics
This article is for general educational purposes only and does not constitute financial advice. Rules and rates change — verify specifics with your bank, employer, or a qualified advisor before acting.