What is a CD (certificate of deposit)?

Banking and credit · 3 min read · Updated

In short: a certificate of deposit (CD) is a savings account where you agree to leave your money with a bank or credit union for a fixed time, called the term, usually in return for a fixed interest rate. If you take money out before the term ends, you normally pay an early withdrawal penalty. CDs at insured banks and credit unions are covered by deposit insurance.

How a CD works

  1. You choose a term, often from 3 months to 5 years, and put in a lump sum.
  2. The bank pays interest, shown as an APY. On most CDs the rate is fixed for the whole term.
  3. At the end, called maturity, you can take the money and interest out, or let it renew.

Credit unions offer the same product under the name share certificate.

Early withdrawal penalties

If you need the money before maturity, the bank usually charges a penalty, often worked out as a number of months' interest. On a short CD the penalty can eat into the money you put in, not just the interest. The penalty is in the account agreement: read it before you open the CD. Some banks offer "no-penalty" CDs, which usually pay a little less.

What happens at maturity

Many CDs renew automatically for the same term at whatever rate the bank is paying then, which may be lower. Banks usually give you a short window after maturity, often around 7 to 10 days, to withdraw or change the term without a penalty. Put the maturity date in your calendar.

CD or savings account?

CD and savings account compared
CDSavings account
RateUsually fixed for the termCan change at any time
AccessPenalty if taken out earlyEasy, sometimes with limits
Good forMoney you won't need for a known timeEmergency fund and everyday saving

An emergency fund is usually better kept in savings, where you can reach it without a penalty.

A CD ladder

A ladder splits your money across CDs that mature at different times. For example, instead of putting $3,000 in one 3-year CD, you could put $1,000 each into 1-, 2- and 3-year CDs. Every year one matures, so part of your money becomes available, and you can renew it or use it.

Brokered CDs

Some brokerage firms sell CDs issued by banks. These can work differently: you may have to sell them to someone else if you want out early, and the price can be lower than what you paid. Check that the issuing bank is FDIC-insured and ask how you would get your money out early.

Handy tools

General information, not financial advice. Rules, fees and rates change and depend on your situation. Check with your bank, the provider or a qualified professional before you decide.

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