What Is a CD (Certificate of Deposit)?

Key takeaways about certificates of deposit:

• A CD is a type of savings account with a fixed time period and interest rate.

• CDs tend to have higher rates than regular savings accounts but don’t allow easy access to your money until a term ends.

• Consider a CD for two reasons: to have guaranteed returns without much risk and to have a safe place for savings earmarked for future use.

A CD, or certificate of deposit, is a type of savings account with a fixed interest rate that’s usually higher than a regular savings account. It also has a fixed term length and a fixed date of withdrawal, known as the maturity date. You lock funds in a CD for a term generally ranging from three months to five years. CDs don’t have monthly fees, but most have an early withdrawal penalty.

Like regular savings accounts, certificates of deposit are insured, so you get your money back in the unlikely event your bank goes bankrupt. CDs at banks are insured by the Federal Deposit Insurance Corp^[0]

Share certificates, or simply certificates, are the name for CDs at credit unions, the not-for-profit equivalent of banks. Certificates at credit unions are insured by the National Credit Union Administration^[0]

CD refers to certificate of deposit, which was historically a paper document that showed proof that your funds were held in a bank at a certain rate^[0]

These days, CDs don’t usually come with a paper, but your funds are still held and federally insured up to $250,000 per account at banks and credit unions. Learn more about what a deposit is.

A CD is different from a traditional savings account in several ways.

• CDs tend to have higher rates than regular savings accounts. These rates are higher in exchange for no access to that money during a CD's term. The combination of CDs’ low risk and high rates compared to other bank accounts can make them an attractive investment. That said, check out the best high-yield savings accounts if you want the flexibility of adding funds over time or taking advantage of higher rates.

• Savings account rates change over time; CD rates stay fixed once you open a CD. This can be an advantage: CDs have guaranteed returns, and if you open a CD when interest rates are high, you can enjoy that rate even if banks drop rates on savings accounts and new CDs.

• Savings accounts give regular access to your money; CDs don’t. You can deposit and withdraw from a savings account relatively freely, but the only time you can withdraw from most CDs penalty-free is during a short period of days after a term ends. (The only exception is no-penalty CDs, discussed later in this article.)

The process for opening a certificate of deposit starts the same way as for other bank accounts: Apply online or in person at a financial institution. The key difference is that your initial deposit into a CD will almost always be the only deposit you can make. You can’t add contributions over time like you can with a regular savings or checking account.

» Curious about CD returns? See our CD calculator

The interest earned in a CD is usually compounded and credited to the account, either daily or monthly, and you receive it all when the CD term ends. (Or you can choose to receive regular interest payments if the bank allows it.)

Once a CD’s term ends, a bank will typically renew your CD at a new rate, which tends to match that of new CDs for the same term. This might not be in your best interest, since it’s better to compare the best CD rates each time you open a new CD. (See our article for more details on when CDs mature.)

This depends on your savings goals. Choosing between short- and long-term CDs comes down to balancing the rates and length of time you want to commit. Traditionally, the longer the term length — the longer you commit funds to a CD — the higher the interest rate^[0]

» Not sure how to open a CD? Here's a step-by-step guide to opening a CD account

Opening a CD with one of the best rates might mean joining a bank or credit union outside of your primary financial institution, such as an online bank. That move can be worth it, especially to get far better rates than you’d get at traditional banks. See our guide to how to open a CD.

• You want to protect designated savings. If you have money set aside for a large future purchase such as a car or down payment, a certificate of deposit can be a good way to keep it safely out of reach and let it earn interest.

• You want returns without much risk. Investing in CDs can make sense if you want to avoid the volatility of the stock market and earn a return that’s typically better than other savings accounts. The national average rate for a regular savings account is 0.35%, far below the average rate for a five-year CD of 1.26% annual percentage yield, according to the Federal Deposit Insurance Corp. (See much higher yields on our roundup of the best five-year CD rates.)

Besides the five-year CD, another route is to go for high-yield three-month, six-month or one-year CDs, which might be better if you’d rather wait months instead of years for access to your funds. (See the best three-month rates or the best six-month rates for this month.)

• For savings you might need in a pinch, including your emergency fund. Breaking into a CD early and paying a penalty can be a blow to your savings.

• When you’re building up savings. A CD requires a lump sum upfront and most don’t let you add contributions after the initial deposit. A savings account is better suited for growing your wealth bit by bit.

» For some of the highest rates, check out NerdWallet’s best savings accounts

Focus on the reasons you want a CD. Do you have a lump sum of money to save for a big purchase in a few years? Or do you have some savings earmarked for investing down the road? CDs provide a place to lock away a sum. Learn more about whether CDs are worth it.

You don’t want to base your decision solely on what rates are available, but it’s helpful to know where rates are going. The Fed has raised its rate multiple times in 2022, which encourages banks and credit unions to raise their CD rates. Learn more about how the Fed affects CD rates.

Yes, CDs are federally insured by every bank and credit union that has deposit insurance. Up to $250,000 is guaranteed to be returned to you if a bank goes bankrupt. For more information, see this explainer on FDIC insurance for CDs.

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 exhaustive list of each type, see the 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. (Learn more about high-yield CDs.)

• Jumbo CD: This is essentially the same as a regular CD, but with a high minimum balance requirement — historically $100,000 — as a trade-off for traditionally higher rates. (See more details about jumbo CDs.)

• 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 or step-up CD: These CDs usually have a jump to a higher interest rate during the CD term. Bump-up CDs require you to ask for that rate jump, if available, while step-up CDs work on a fixed schedule of rate increases. Both types typically have lower interest rates than fixed-rate CDs, and some carry steeper minimum deposit requirements. In some cases, you can request only one rate increase, although long-term CDs may let you do so more than once. (Learn more about bump-up and step-up CDs.)

• 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.)

When a CD matures, or expires, there’s a grace period of about a week in which you can withdraw funds. After that period, many CDs automatically renew for the same term they had previously, but the rate will likely be based on the rate for new CDs of that term, not your CD's original rate. Withdrawals before the next maturity date are subject to a penalty. Learn more about your options when CDs mature.

When you withdraw early from most CDs, you tend to pay a penalty that consists of several months to a year’s worth of interest. See our calculator with a list of various banks’ CD early withdrawal penalties.

CD rates are in terms of annual percentage yield, or APY. This is the annual interest rate after compounding. And compounding is when your account earns money off both the original deposit and the increasing interest.

» See the value of high rates with our CD comparison calculator

Yes, especially at online banks and credit unions. For more context on recent rates, see current CD rates. If you want a broader understanding of CD yields over decades, take a look at historical CD rates.

» Stuck in a lower-rate CD? Here's a guide to when breaking a CD early pays off

A CD ladder is a type of saving strategy that involves opening both short- and long-term CDs. This provides more flexibility than putting cash in one CD, so you can go for the higher rates of a three- to five-year CD and still have regular access to some of your money over time.

» Learn more about three types of CD strategies

Here’s how it works: You invest proportionally in a variety of term lengths. Then, as each shorter certificate matures, you reinvest the proceeds in a new long-term CD. (To compare short-term options, see our list of the best one-year CDs. Or if you’re building a longer ladder, see three-year CDs.)

Let’s say you have $10,000 for CDs. You invest $2,000 apiece in one-, two-, three-, four- and five-year CDs. When the one-year CD matures, you put that money into a new five-year CD. The next year, you reinvest funds from the matured two-year CD in another five-year CD. You can repeat the process until you have a five-year CD maturing every year, or opt to withdraw penalty-free from whatever CD is maturing a given year if you need some cash.

Get a closer look at the best rates on certificates of deposit:

• Best CD rates overall.

• Best 3-month CD rates.

• Best 6-month CD rates.

• Best 1-year CD rates.

• Best 3-year CD rates.

• Best 5-year CD rates.

• Best no-penalty CD rates.

• Best IRA CD rates.

• Best jumbo CD rates.

• Best credit union CD rates.

If you’re curious about all the features of CDs at specific banks, here’s a quick list of both traditional and online banks’ CDs (and one brokerage’s offering):

• Ally Bank CD rates.

• Bank of America CD rates.

• Capital One CD rates.

• Chase CD rates.

• Discover Bank CD rates.

• Fidelity CD rates.

• Marcus CD rates.

• Synchrony CD rates.

• Wells Fargo CD rates.

Learn more about the journey of choosing, opening and closing CDs. For choosing CDs:

• Are CDs worth it?

• CDs vs. regular savings accounts.

• CDs vs. money market accounts.

• CDs vs. bonds.

For understanding CD rates:

• CD calculator.

• Current CD rates.

• Historical CD rates.

• Fed rate increase: What it means for CDs.

For opening CDs:

• Opening a CD account in 5 steps.

• What is a CD ladder?

• How to invest in CDs: 3 strategies.

For closing CDs:

• When your CD matures: What to know.

• CD early withdrawal penalty by bank.

• How to avoid a CD early withdrawal penalty.

Investing in a certificate of deposit isn’t the quickest way to grow your money, but it offers a guaranteed return and safety that money in the stock market doesn’t have. A CD with a good rate can play an important role in your overall savings plan.

By choosing the right type of CD, taking advantage of a CD ladder strategy and avoiding withdrawal penalties, you can earn a solid return on your money, all while having your savings backed by the federal government.