A CD rate is the interest percentage a bank pays you for locking your money away for a set time

When you open a certificate of deposit (CD), you give the bank a lump sum of money—say $5,000—and agree not to touch it for a fixed period, usually three months to five years. In exchange, the bank pays you interest at a rate it sets when you open the account. That rate is the CD rate, and it's locked in for the entire term. If the rate is 4.5%, you'll earn 4.5% on your deposit over the life of the CD, regardless of what happens to interest rates in the market after you've signed up.

The bank uses your money to make loans and investments while you hold the CD. Because you've promised not to withdraw early, the bank can count on having that cash available, which makes your money more valuable to them than it would be in a regular savings account where you can pull funds out anytime. That's why CD rates are typically higher than savings account rates at the same bank.

Key Takeaways

  • CD rates are fixed when you open the account and do not change, even if market rates rise or fall during your term.
  • Longer CD terms usually offer higher rates than shorter ones, because you're locking your money away for more time.
  • CD rates vary by bank, by term length, and by the size of your deposit—shopping around can mean hundreds of dollars in extra interest.
  • If you withdraw money before the CD matures, you'll pay an early withdrawal penalty that can wipe out most or all of your interest earnings.
  • CD rates move with the Federal Reserve's interest rate decisions, so rates rise when the Fed raises rates and fall when the Fed cuts them.

Why CD rates change over time

CD rates don't stay the same forever. Banks adjust the rates they offer based on what the Federal Reserve does with its benchmark interest rate. When the Fed raises its rate, banks typically raise CD rates too, because they can borrow money more cheaply and can afford to pay you more. When the Fed cuts its rate, banks usually lower CD rates because borrowing costs them less and they don't need to pay you as much to attract deposits.

This means the CD rate you see today might be very different from the rate you saw six months ago or will see six months from now. The rate you lock in on the day you open your CD is the one you keep for the entire term—but new CDs opened next month will have different rates. If you open a one-year CD at 4.5% and rates drop to 3% by next month, you still earn 4.5%. If rates jump to 5.5%, you're stuck at 4.5%, which is why timing matters when you're deciding whether to open a CD.

How term length affects your rate

Banks almost always pay higher rates for longer CD terms. A three-month CD might pay 4%, a one-year CD might pay 4.5%, and a five-year CD might pay 5%. This is because the bank wants to lock in your money for as long as possible—the longer they have it, the more they can lend it out and earn from it.

The difference between short and long terms can be significant. On a $10,000 deposit, the difference between a 4% rate and a 5% rate means you earn $100 more per year. Over five years, that adds up. However, longer terms also mean more risk for you: if you need the money before the CD matures, you'll face an early withdrawal penalty, which is why many people use a CD ladder—opening multiple CDs with different maturity dates so some money becomes available each year without penalty.

How deposit size influences the rate you get

Some banks offer higher rates for larger deposits. A bank might pay 4.5% on a $1,000 CD but 5% on a $25,000 CD. This is called a tiered rate structure, and it rewards customers who deposit more money at once. Not all banks use tiered rates—many offer the same rate regardless of deposit size—so it's worth checking the fine print when you're comparing CDs.

If you have a large sum to deposit, ask the bank whether they have deposit tiers and what the thresholds are. Sometimes moving from $10,000 to $15,000 unlocks a noticeably higher rate. On the flip side, if you only have $1,000 to deposit, you might find better rates at online banks, which often pay competitive rates on smaller deposits because their overhead is lower.

The difference between APY and the stated rate

Banks quote CD rates in two ways: the interest rate (sometimes called the nominal rate) and the annual percentage yield, or APY. The APY is the number that matters, because it accounts for compounding—the way interest earned gets added back to your principal and then earns interest itself.

If a CD compounds interest monthly, you earn a small amount each month, and next month you earn interest on that interest too. Over a year, compounding adds up. A CD with a 4% interest rate might have an APY of 4.08% if it compounds monthly. The difference is small on short terms but meaningful on longer ones. Always compare APYs, not just the stated rate, when you're choosing between CDs.

What happens when your CD matures

When your CD term ends, the bank sends you the money—your original deposit plus all the interest you've earned. At that point, you have a choice: open a new CD at whatever rate the bank is currently offering, move the money to a savings account, invest it elsewhere, or withdraw it entirely.

Some banks have an automatic renewal feature, which means if you don't tell them what to do when the CD matures, they'll automatically roll the money into a new CD at the current rate. That new rate might be higher or lower than what you had before. To avoid surprises, mark your maturity date on your calendar and contact the bank a week or two before it arrives to decide what you want to do next.

Early withdrawal penalties and how they work

If you need your money before the CD matures, the bank will let you have it—but you'll pay an early withdrawal penalty. The penalty is usually a certain number of months' worth of interest. A CD might have a penalty of three months' interest, which means if you withdraw early, the bank subtracts three months of what you would have earned and gives you the rest.

On a small CD or a short-term CD, this penalty might be minimal. On a large CD or a long-term one, it can be substantial. A five-year CD with a penalty of six months' interest could cost you hundreds of dollars if you need the money after two years. Before you open a CD, read the penalty terms carefully. Some banks offer no-penalty CDs, which let you withdraw without a penalty, though the rate is usually lower than a standard CD to make up for that flexibility.

How to compare CD rates across banks

CD rates vary significantly from bank to bank. One bank might offer 4.5% on a one-year CD while another offers 5.2% for the same term. Over a year, that 0.7% difference means real money—on a $10,000 deposit, it's $70 in extra interest.

To find the best rate, check your current bank first, then look at online banks, credit unions, and other regional banks. Websites that track CD rates can show you what's available, though you'll still need to visit each bank's website to confirm the current rate and open an account. Pay attention to the term length, the APY, the minimum deposit, and the early withdrawal penalty. The highest rate isn't always the best deal if the penalty is harsh or the minimum deposit is more than you have.

Frequently Asked Questions

Can I change my CD rate after I open it?

No. Once you open a CD, your rate is locked in for the entire term. If rates rise, you don't benefit. If rates fall, you keep your higher rate. This is why some people open multiple CDs at different times—to spread out their rate risk.

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

A savings account lets you withdraw money anytime without penalty, but it pays a lower interest rate. A CD pays higher interest but locks your money away for a set term. If you withdraw early from a CD, you lose interest. Choose a CD if you won't need the money for several months or longer.

Do I pay taxes on CD interest?

Yes. CD interest is taxable income. The bank will send you a 1099-INT form at tax time showing how much interest you earned. You'll report this on your tax return. This is one reason some people prefer CDs in retirement accounts like IRAs, where the interest can grow tax-deferred.

Is my CD protected if the bank fails?

If your CD is at an FDIC-insured bank, your deposit and interest are protected up to $250,000 per account owner per bank. Most banks are FDIC-insured. Check the bank's website or call to confirm before you open a CD.

Should I open a CD now or wait for rates to go higher?

No one can predict where rates will go. If you need a safe place for money you won't touch for several months, a CD at today's rate locks in that return. If you think rates might rise soon, you could open a shorter-term CD now and a longer-term one later, or keep money in a high-yield savings account temporarily while you wait.