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- A certificate of deposit (CD) is a type of deposit account that offers a fixed interest rate.
- To earn that rate, you'll typically need to keep your funds in the account for a certain period of time.
- Types of CDs range from no-penalty CDs to step-up CDs to jumbo CDs.
If you've got some extra cash and you're wondering where to park it, you've probably looked at savings accounts. You might want to consider a certificate of deposit (CD) if you do not need immediate access to your money.
Here are common types of CDs and how to determine which is the best CD for you.
What is a CD?
A CD is a type of bank account that can offer higher interest rates than a traditional savings account in exchange for keeping your money in the account for a set period of time.
For example, if you put your money in a 2-year CD, you typically can't withdraw any of it (at least without incurring a penalty) for two years. At the maturity date, though, your balance will have increased thanks to the account's fixed interest rate.
There's no fee to open or maintain a CD, although there's usually a minimum deposit. Not every financial institution offers CDs, but you'll find them at many traditional banks, online banks, and credit unions.
When you open a CD and deposit your funds, you're agreeing to keep them there for the full term, which can range from a few days to five years — or more. Typically, the longer the term, the higher the interest rate you'll earn. Your money is insured by the FDIC (up to $250,000 per CD, per institution), so there's no risk of losing it like there is with investing.
There are several different types of CDs to meet different financial needs — here are a few.
Traditional CDs
What are traditional CDs?
With a traditional CD, your money stays in an account at your bank or credit union for a specific period of time and earns a fixed amount of interest. The most common term lengths are 1 month, 3 months, 6 months, 1 year, 2 years, 3 years, 4 years, and 5 years.
Interest is earned on the initial deposit as well as any interest payments added to your balance throughout the term.
If you withdraw or cash out your CD before the maturity date, you will typically pay a penalty of at least three months of interest.
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Who are traditional CDs best for?
Risk-averse investors seeking predictable returns should consider a traditional CD. It's a strong choice over a savings account when you can find comparable (or better) rates because a CD locks in the rate, whereas a savings account's rate is liable to fluctuate.
No-penalty CDs
What are no-penalty CDs?
No-penalty CDs don't charge a penalty for early withdrawals, but they typically have lower interest rates. There's usually a brief lock-up period, such as seven days, but after that, you won't pay to withdraw your CD before the maturity date.
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Who are no-penalty CDs best for?
If you're seeing higher rates on a CD than a savings account, but you want the flexibility to remove your money without sacrificing any of your interest earnings, this may be the CD for you.
Bump-up CDs
What are bump-up CDs?
A bump-up CD lets you request a rate increase one or more times during your term whenever the bank has raised rates on newly-issued CDs for the same term.
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Who are bump-up CDs best for?
If you're saving money for a savings goal that's two or more years away, a bump-up CD may be worth considering. If you anticipate interest rates will go up during your term, this type of CD gives you the chance to increase your rate without having to move your money to a new CD.
Step-up CDs
What are step-up CDs?
Similar to bump-up CDs, step-up CDs give you the opportunity to get a rate increase during your term. The difference is that the bank decides beforehand when the rate goes up, how often, and by how much. These CDs are rare and tend to have limited term lengths available.
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Who are step-up CDs best for?
Step-up CDs offer one or more guaranteed rate increases, which can be helpful if you choose an extended term length, such as two or more years.
Jumbo CDs
What are jumbo CDs?
Jumbo CDs are traditional CDs that require high minimum deposits (often $100,000+) in exchange for higher interest rates.
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Who are jumbo CDs best for?
Jumbo CDs are good for people with substantial savings who want to grow their money without risk. A jumbo CD could be ideal for setting aside a down payment or cash you're not quite ready to invest.
Other CD types
Brokered CDs
You buy a brokered CD at a brokerage firm or investment company. Buying and selling brokered CDs is similar to trading stocks, and you won't incur a penalty for selling one before the maturity date. However, the price you get for your brokered CD depends on market conditions and demand for CDs with your term length and rate, and may be lower than your initial deposit.
Most brokered CDs are callable CDs, meaning the issuing bank can decide to end the contract early. In that case, it will return your initial deposit and any interest you haven't collected yet.
IRA CDs
This is a CD you buy with your traditional or Roth IRA. An IRA CD is best used as part of a larger retirement savings strategy. It can help keep some of your savings safe from market risk but still earning a decent and predictable rate of return.
Unlike traditional CDs, IRA CDs grow tax-deferred.
How are CD rates determined?
The Federal Open Market Committee (FOMC), a committee within the Federal Reserve, sets the target interest rate (known as the federal funds rate) eight times each year.
While the interest rates on consumer financial products like savings accounts, credit cards, and loans aren't equal to the federal funds rate, they're often tied to and influenced by it. This means that CD rates typically rise and fall with the federal funds rate.
While the federal interest rate sets a benchmark for CD interest rates as a whole, individual CD products can have different interest rates depending on the following factors:
- Length of CD term
- Your deposit amount
- Type of CD
- The financial institution
Should I get a CD?
A CD is worth considering for anyone with a little extra savings they don't plan on spending any time soon. These accounts strike a good balance between returns and safety, allowing you to earn more on your money without taking on any risk.
But if you choose to open a CD, just make sure you can keep your money parked for the full term of the CD you choose, unless you have a no-penalty CD.
If you end up paying an early withdrawal penalty, the extra interest you earn with a CD isn't usually worth it. Consider your options and whether or not you'll need that money in the near future before stashing it in a CD.
Types of CDs FAQs
What is the best type of CD for me?
Your time horizon, risk tolerance, deposit amount, and financial goals are primary factors to consider. These should match with the interest rate and term length you choose.
What are the current CD rates?
According to the FDIC, the national average CD rate is between 0.23% to 1.80%APY, depending on term length. Credit unions and banks will list current rates on their websites. Many pay more than the national average, and some as high as 5% or more.
Can I lose money in a CD?
The Federal Deposit Insurance Corporation (FDIC) insures CDs for up to $250,000 per depositor, per institution, so your money is safe from a bank failure. Your initial deposit is also safe, but if you cash out a CD early, you may lose some interest earnings.
Elizabeth Aldrichis a finance writer specializing in credit cards and loans, retirement planning, investing, economics, and small business. Her work has appeared on The Motley Fool, USA Today, MSN Money, Yahoo! Finance, Bankrate, and Business Insider. She's an avid credit card points collector and perpetual traveler.
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