The basic steps to open a CD

Buying a CD means giving your bank money for a set period—usually three months to five years—in exchange for a fixed interest rate. You walk into a branch or log into your online account, tell the bank how much you want to deposit and how long you want to lock it away, and they set up the account. The bank holds your money and pays you interest on a schedule they set. When the term ends, you get your original deposit back plus the interest earned.

The process takes minutes if you already have a checking or savings account at that bank. If you don't, you'll need to open a regular account first—the bank won't let you jump straight to a CD. Most banks let you buy a CD online without visiting a branch, though some still require you to come in person or call.

Key Takeaways

  • You need an existing account at the bank before you can open a CD—you cannot open a CD as your first account.
  • The bank will ask you three things: how much to deposit, how long to lock it away, and whether to renew automatically when the term ends.
  • Interest rates vary by bank and by term length, so comparing rates across three or four banks before you commit saves real money.
  • Your money is locked in—withdrawing early usually costs you a penalty that eats into or wipes out your interest earnings.
  • CDs are insured by the FDIC up to $250,000 per bank per term length, so your deposit is protected even if the bank fails.

What information the bank will ask for

When you sit down to buy a CD—whether in person, online, or by phone—the bank needs three pieces of information from you. First, the deposit amount: how much money you're putting in. Most banks have a minimum, often $500 or $1,000, though some online banks go as low as $100. Second, the term length: how many months or years you're locking the money away. Common terms are 3 months, 6 months, 1 year, 2 years, 3 years, and 5 years. Third, what happens when the term ends—whether you want the bank to automatically renew the CD for another term at whatever rate they're offering then, or whether you want them to move the money back to your checking or savings account.

That's genuinely all they need. You don't have to decide how often interest gets paid—the bank decides that. You don't have to pick an investment strategy—there is none. You're not choosing between options. You're just telling the bank the size, the length, and what to do at the end.

How to compare rates before you commit

Interest rates on CDs change constantly and vary wildly between banks. A 1-year CD at one bank might pay 4.5 percent while another pays 3.2 percent—that's a real difference in money you'll actually earn. Before you deposit anything, spend 15 minutes checking rates at three or four banks. You can do this online without talking to anyone.

Look at the rate for the specific term length you want. A bank's 1-year rate tells you nothing about their 2-year rate. Write down the rate and the term for each bank you check. Multiply your deposit by the rate to get a rough sense of how much interest you'll earn—a $5,000 CD at 4.5 percent for one year earns roughly $225 before taxes. The difference between 4.5 percent and 3.2 percent on that same $5,000 is about $65 over the year. That's worth the 15 minutes of checking.

Online banks often pay higher rates than brick-and-mortar banks because they have lower overhead costs. If you already bank somewhere in person and like it, that's fine—but at least check one online bank's rate so you know what you're giving up, if anything.

Where to buy a CD

You can buy a CD at any bank where you have an account. If you have a checking account at Chase, you can open a Chase CD. If you bank at a local credit union, you can open a CD there. You can also open a CD at a bank where you don't currently have an account—you'll just have to open a checking or savings account first, which takes a few minutes online or in a branch.

Online banks like Marcus, Ally, and American Express Bank let you open both a regular account and a CD entirely online, without visiting a physical location. Credit unions offer CDs too, and sometimes at competitive rates. The FDIC insures CDs at banks and the NCUA insures CDs at credit unions, so either is safe up to $250,000 per account per term length.

The bank you choose doesn't have to be where you keep your main checking account. Some people keep their checking at a local bank for convenience and their CDs at an online bank for better rates. You can move money between them whenever you want—just remember that once the CD term starts, you can't touch that money without a penalty.

What happens after you buy the CD

Once your CD is open, there's nothing to do. The bank holds your money, and on whatever schedule they set—usually monthly or quarterly—they add interest to your account. You can watch the balance grow if you log in, but you can't touch it. The money sits there earning interest until the term ends.

When the term ends, the bank will send you a notice a few days before. If you set it to auto-renew, they'll roll the money into a new CD at whatever rate they're offering then—which might be higher or lower than what you got before. If you didn't set it to auto-renew, the money moves back to your checking or savings account, and you can do whatever you want with it.

If you need the money before the term ends, you can withdraw it, but the bank will charge you a early withdrawal penalty. This penalty is usually a certain number of months' worth of interest. On a 1-year CD, the penalty might be three months of interest. If you earned $100 in interest but the penalty is $100, you break even. If the penalty is higher than your interest, you actually lose money. Always ask what the penalty is before you buy—it's in the disclosure the bank gives you, but it's worth understanding upfront.

The difference between CDs at banks versus credit unions

Banks and credit unions both offer CDs, and the process is almost identical. The main differences are insurance and sometimes rates. Bank CDs are insured by the FDIC up to $250,000 per bank per term length. Credit union CDs are insured by the NCUA up to $250,000 per credit union per term length. Both protections are equally solid—if the institution fails, your money is protected.

Credit unions sometimes offer slightly higher rates because they're member-owned and don't have shareholders to pay. But not always—it depends on the specific credit union and the specific bank. The only way to know is to compare rates. If you're already a member of a credit union, check their CD rates. If you're not, you might have to join to open a CD there, which usually means opening a savings account and meeting a membership requirement—often as simple as living in a certain area or working for a certain employer.

Understanding early withdrawal penalties

An early withdrawal penalty is a fee the bank charges if you take your money out before the CD term ends. The penalty is usually expressed as a number of months of interest. A CD with a three-month penalty means if you withdraw early, you lose three months' worth of the interest you would have earned.

Here's how it works in practice: You buy a 1-year CD with $5,000 at 4.5 percent interest. The bank will pay you roughly $225 in interest over the year. If you withdraw after six months, the bank gives you your $5,000 back, but they subtract a three-month penalty—roughly $56 in interest. You walk away with $5,000 plus $56 in interest, instead of the full $225 you would have gotten if you'd waited.

Some CDs have no penalty or a very small one, but they usually pay lower interest rates to make up for it. The bank is trading you: lower penalty, lower rate. Higher penalty, higher rate. Before you buy, ask what the penalty is and do the math. If you think there's even a small chance you'll need the money, a no-penalty CD might be worth the lower rate.

Frequently Asked Questions

Can I open a CD if I don't have a checking account at that bank?

No. Banks require you to have an existing account—usually a checking or savings account—before you can open a CD. If you don't have one, you'll need to open it first. This takes a few minutes online or in a branch and requires basic information like your name, address, and Social Security number.

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

A savings account lets you deposit and withdraw money whenever you want, but it pays a lower interest rate. A CD locks your money away for a set period and pays a higher rate in exchange. If you need the money before the CD term ends, you pay a penalty. A savings account has no penalty—you can take your money out anytime.

Do I have to renew my CD when the term ends?

No. When the term ends, you can let it renew automatically if you set it up that way, or you can move the money to your checking or savings account and do something else with it. If you don't want it to renew, tell the bank before the term ends, or they'll roll it into a new CD at their current rate.

Is my money safe in a CD?

Yes. CDs at banks are insured by the FDIC up to $250,000 per bank per term length. CDs at credit unions are insured by the NCUA up to the same amount. If the bank or credit union fails, the government protects your deposit. You cannot lose money in a CD due to the institution failing.

Can I buy multiple CDs at the same bank?

Yes. Each CD is insured separately up to $250,000 if they have different term lengths. If you want to deposit $500,000, you could open a 1-year CD for $250,000 and a 2-year CD for $250,000 at the same bank, and both would be fully insured. If you open two 1-year CDs for $250,000 each, only one is insured.