What is a Certificate of Deposit (CD)
A certificate of deposit (CD) is a federally insured savings product that pays a fixed interest rate in exchange for locking up your money for a set term — typically offering higher yields than standard savings accounts.
A certificate of deposit (CD) is a time-deposit savings account offered by banks and credit unions. You deposit a sum of money for a fixed period — the term — and in exchange, the institution pays you a guaranteed interest rate, typically higher than a standard savings account. At the end of the term (called maturity), you receive your original deposit plus accumulated interest.
CDs are federally insured up to $250,000 per depositor per institution (FDIC for banks, NCUA for credit unions), making them one of the lowest-risk savings instruments available.
How CDs Work
- You choose a term (e.g., 6 months, 1 year, 5 years) and deposit amount
- The bank locks in a fixed APY (Annual Percentage Yield) for that term
- Your money is inaccessible during the term without paying an early withdrawal penalty
- At maturity, you can withdraw funds + interest, or roll into a new CD
Common CD Terms and Rate Patterns
| Term | Typical Use Case |
|---|---|
| 3–6 months | Short-term cash parking |
| 1 year | Medium-term savings goal |
| 2–5 years | Locking in higher rates when yields are elevated |
Generally, longer terms offer higher rates — but not always. In inverted yield curve environments, short-term CDs can actually offer higher rates than longer ones.
CD Laddering
CD laddering is a strategy to balance liquidity with higher yields. Instead of locking all your money into one long-term CD, you split it across several CDs with different maturity dates:
- $5,000 in a 1-year CD
- $5,000 in a 2-year CD
- $5,000 in a 3-year CD
As each CD matures, you reinvest at the longest rung. This gives you partial access to funds every year while capturing longer-term rates on a portion of the portfolio.
CD vs. High-Yield Savings Account
| Feature | CD | High-Yield Savings |
|---|---|---|
| Interest rate | Fixed, often higher | Variable |
| Liquidity | Locked — penalty to exit early | Fully accessible |
| APY stability | Guaranteed for term | Can decrease at any time |
CDs are better when you want rate certainty for a known time horizon. High-yield savings accounts are better for an emergency fund where you may need access at any time.
Early Withdrawal Penalties
Accessing your money before the CD matures triggers a penalty — typically 3–12 months of interest, depending on the term and the institution. On short-term CDs, this can eliminate most of the earned interest.
For current CD rates across banks and credit unions, Bankrate's CD rate comparison tool lets you compare APYs by term and deposit amount in one place.