What a CD actually does

A certificate of deposit is an agreement between you and a bank. You give the bank a lump sum of money, the bank promises to hold it for a specific length of time (called the term), and in exchange the bank pays you a fixed interest rate. When the term ends, you get your original money back plus the interest earned.

The key difference from a regular savings account: you agree not to touch the money until the term is over. In exchange, the bank gives you a higher interest rate than you'd get in a savings account. If you need the money before the term ends, you pay a early withdrawal penalty — a fee that reduces how much you get back.

CDs are insured by the FDIC (Federal Deposit Insurance Corporation) up to $250,000 per account holder per bank, the same as regular savings accounts. Your money is safe at the bank, and you're not risking it in the stock market or anywhere else.

Key Takeaways

  • You deposit a fixed amount of money for a set period — typically three months to five years — and the bank pays you a may provide interest rate.
  • The interest rate on a CD is higher than a savings account rate because you're agreeing to leave the money untouched for the full term.
  • If you withdraw money before the term ends, you pay an early withdrawal penalty that eats into your earnings or principal.
  • CDs are FDIC-insured up to $250,000, so your money is protected even if the bank fails.
  • When your CD matures (the term ends), you can withdraw the money, open a new CD, or let it roll over into another CD at the bank's current rate.

How the interest rate and term length work together

Banks set CD rates based on what the Federal Reserve is doing and how much competition exists in your area. Longer terms usually come with higher rates — a five-year CD will pay more than a three-month CD, because you're locking your money away for longer and the bank can use it for longer. But rates change constantly, so a five-year CD opened today might pay less than a one-year CD opened next month if rates rise.

The term is the period you commit to. Common terms are three months, six months, one year, two years, three years, and five years. Some banks offer one-month or ten-year CDs, but those are less common. You choose the term when you open the CD, and you cannot change it later without paying the early withdrawal penalty.

Interest on a CD is usually compounded daily or monthly, meaning the bank calculates interest on your principal plus any interest already earned. The longer the term, the more compounding happens, which is another reason longer CDs pay more total interest.

What happens when your CD reaches maturity

When your term ends, your CD matures. The bank sends you a notice a few days before the maturity date telling you what happens next. You have three main options: withdraw the money, open a new CD, or let the bank automatically roll it over.

If you do nothing, most banks automatically roll your CD into a new CD with the same term at whatever rate the bank is currently offering. This happens within a few days of maturity. If rates have dropped, your new CD will pay less. If rates have risen, you might wish you'd rolled over sooner. You usually have a grace period (often seven to ten days) after maturity to withdraw the money without penalty if you change your mind about rolling over.

If you want to withdraw the money, you can do so without penalty once the CD matures. The bank deposits the principal plus all interest earned into your linked checking or savings account, or you can request a check.

Early withdrawal penalties and when they apply

If you need your money before the term ends, the bank charges an early withdrawal penalty. The penalty amount varies by bank and by term length. A three-month CD might have a penalty of one month's interest, while a five-year CD might have a penalty of six months' interest or more. Some banks calculate the penalty as a percentage of the principal instead.

The penalty comes out of your earnings first. If you've earned $200 in interest and the penalty is $150, you get back your full principal plus $50 in interest. If the penalty is larger than your earnings, it comes out of your principal — you get back less money than you deposited.

A few banks offer "no-penalty CDs" that let you withdraw early without a fee, but these pay lower interest rates to compensate. They're useful if you think you might need the money but want a may provide rate higher than a savings account.

How to open a CD and what information you need

Opening a CD is straightforward. You can do it online, by phone, or in person at a bank branch. You'll need to provide your Social Security number, date of birth, and address so the bank can verify your identity and report interest earnings to the IRS. If you're opening a CD in a joint account, both account holders need to provide this information.

You choose how much to deposit (the bank has a minimum, often $500 or $1,000, but some online banks have no minimum), which term you want, and whether you want the interest paid to you monthly or added to the CD. You also decide whether to link a checking or savings account where the bank will deposit your money when the CD matures.

Once you submit the information, the bank transfers the money from your linked account and the CD opens immediately. You receive a confirmation with the CD's rate, term, maturity date, and penalty amount. Keep this for your records.

CD ladders: spreading your money across multiple CDs

A CD ladder is a strategy where you open several CDs with different term lengths instead of putting all your money in one CD. For example, you might open five one-year CDs, staggering the maturity dates so one matures every few months. As each one matures, you can withdraw the money, open a new five-year CD, or adjust based on what rates are doing.

The advantage is flexibility: you're not locking all your money away for five years, but you're earning higher rates than you would in a savings account. You also benefit if rates rise — when a CD matures, you can open a new one at the higher rate instead of waiting years for your money to become available.

The disadvantage is that you have to manage multiple CDs and keep track of maturity dates. Some people find this tedious, and the interest difference between a ladder and a single long-term CD is usually small.

Comparing CD rates across banks

CD rates vary significantly between banks. A large national bank might offer 4.00% on a one-year CD, while an online bank might offer 4.75% for the same term. Over a year, that difference adds up — on a $10,000 CD, the higher rate earns you $75 more.

Online banks typically offer higher rates than brick-and-mortar banks because they have lower overhead costs. Credit unions sometimes offer competitive rates too, and you don't have to be a member to open a CD at many of them.

When comparing rates, make sure you're looking at the same term length and that the bank is FDIC-insured (or NCUA-insured if it's a credit union). Also check the early withdrawal penalty — a slightly higher rate isn't worth it if the penalty is much steeper. Some websites track CD rates across banks and let you filter by term and rate, making comparison easier.

Frequently Asked Questions

Can I add more money to a CD after I open it?

No. A CD is a fixed agreement — you deposit a set amount at the start, and that amount stays the same until maturity. If you want to deposit more money, you have to open a separate CD. This is another reason some people use CD ladders: they can open new CDs as they save more money.

What happens to my CD if the bank fails?

Your CD is protected by FDIC insurance up to $250,000. If the bank fails, the FDIC takes over and makes sure you get your principal plus all accrued interest, even if the bank goes under. You don't lose money because of a bank failure.

Is the interest rate on a CD may provide?

Yes, once you open the CD, the rate is locked in for the entire term. It will not change, even if the Federal Reserve raises or lowers rates. This is the whole point of a CD — you know exactly how much you'll earn.

Can I withdraw just part of my CD early?

Most banks require you to withdraw the entire CD if you withdraw early — you cannot take out half and leave the rest. If you do withdraw early, the penalty applies to the full amount. Check with your bank, as policies vary.

What's the difference between a CD and a high-yield savings account?

A high-yield savings account has no term — you can withdraw money anytime without penalty — but the rate can change. A CD locks in a fixed rate for a set period, so you earn more if rates fall, but you're stuck with a lower rate if rates rise. CDs typically pay more than savings accounts right now, but you lose flexibility.