Certificate of Deposits

What is a Certificate of Deposit (CD)?

A certificate of deposit (CD) is a product offered by banks and credit unions that provides an interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined period of time. Almost all consumer financial institutions offer them, although it’s up to each bank which CD terms it wants to offer, how much higher the rate will be compared to the bank’s savings and money market products, and what penalties it applies for early withdrawal.

What types of CDs are there?

CDs typically come with a fixed term and a fixed rate of return. But depending on where you bank, you may have access to a few other varieties. (For a more in-depth look at each type, learn about nine types of CDs.)

• No-penalty CD: This CD, also known as a “liquid CD,” lets you withdraw early without an early withdrawal penalty in exchange for typically lower rates than other CDs. (See our list of the best no-penalty CDs.)
• High-yield CD: This CD has higher-than-average CD rates. Online banks and credit unions typically offer better rates than traditional brick-and-mortar banks. (Check the top CD rates.)
• Jumbo CD: This is essentially the same as a regular CD, but with a high minimum balance requirement — upward of $100,000 — as a trade-off for traditionally higher rates. (See more details about jumbo CDs.)
• Add-on CD: This gives you the chance to add contributions over time, like a savings account. CDs normally restrict you to one deposit when you open. But if you get a higher-paying job or come into some money, it can be nice to push some of those funds into an existing CD.
• IRA CD: This is a regular certificate that is held in a tax-advantaged individual retirement account. (See our list of the best IRA CD rates.)
• Bump-up CD: With these CDs, you can request a higher rate if your bank increases its annual percentage yields, or APYs. These CDs typically have lower interest rates than fixed-rate CDs, and some carry steeper minimum deposit requirements. In most cases, you can request only one rate increase, although long-term CDs may let you do so twice.
• Step-up CD: This option provides more predictable rate increases set by the bank, where APYs automatically go up at regular intervals. For example, rates on a 28-month step-up CD might go up every seven months.
• Brokered CD: This is a CD offered at a third party, or broker, such as a brokerage firm. (Learn more about types of brokered CDs, including callable CDs, in our explainer.)
• Foreign currency CD: The foreign currency CD, one of the rarer and more complex types of CDs, ties your money to the value of foreign currencies. This CD doesn’t have a guaranteed return because the interest you’ll earn is based on one currency or a basket of currencies determined by the bank. This creates some risk: Currencies fluctuate based on various factors, including changes in foreign governments as well as international economic conditions

All the while, you’ll be earning a better return while the funds are invested than if you had deposited them in a savings or money market account.

Pros

• Offers a higher rate than you can earn with a savings or money market account
• Pays a guaranteed, predictable rate of return, avoiding the volatility and losses that are possible with stocks and bonds
• Is federally insured if opened with an FDIC bank or NCUA credit union
• Can help fend off spending temptations since withdrawing the funds early triggers a penalty

Cons

• Cannot be liquidated before maturity without incurring an early withdrawal penalty
• Typically earns less than stocks and bonds can over time
• Earns a fixed rate of return regardless of whether interest rates rise during the term

Which CD Term Should I Choose?

There are two important considerations when deciding how long a CD term is right for you. The first centers on your plans for the money. If it’s for a specific goal or project, the expected start of that project will help you determine your maximum CD term length. In contrast, if you’re just socking away cash for which you don’t have a specific purpose in mind, you may opt for a longer term so as to maximize your interest rate.

Secondly, you’ll want to consider what’s expected to happen with the Fed’s rate. If it’s anticipated that the Fed will raise rates—and therefore bank and credit union CD rates will likely rise—short- and mid-term CDs will make more sense than long-term CDs, since you won’t want to be committed to a lesser rate for five years when new, higher rates appear. Conversely, an expectation that rates will decrease in the near term may trigger you to want long-term CDs, so you can lock in today’s higher rates for years to come.

The best thing to do before making a decision is to talk to a financial professional that can help you make the right decisions.