What Is a Certificate of Deposit (CD) — and Is It Right for You?

Looking for a steady, low-risk way to grow your savings? A certificate of deposit (CD) might be a smart choice. CDs offer a fixed interest rate over a set period, giving you a predictable return on your money.

Whether you're planning a big purchase a few years down the road, building your emergency fund or simply looking for a secure way to save, understanding how CDs work can help you make confident, informed financial decisions.

Here’s what you need to know about CDs, how they compare to other savings options and how they could support your long-term savings goals.

What is a CD?

A CD is a type of savings account that offers a guaranteed interest rate on money held for a set amount of time called the term. The yearly interest you earn is called an annual percentage yield (APY).

CDs are considered a low-risk savings option because traditional CDs generally have fixed interest rates and are insured by the Federal Deposit Insurance Corporation (FDIC). They often offer higher APYs than traditional savings accounts, especially for longer terms. Common CD terms range from 3, 6 or 12 months to 4, 5 or even 10 years, giving you a choice in how long you want to lock in your funds.

How does a CD work?

The amount of money you need to open a CD will vary by the bank or credit union and their offerings, but in general, the more money you put in, the more you can earn — especially if you choose a longer term.

You generally can’t add more money to a CD after your first deposit, but policies vary. Some financial institutions may allow you to add more during the first 30 days or so.¹

While they’re one of the lowest-risk savings vehicles, CDs are designed to hold your money for a specific term. If you withdraw funds before the term ends — known as the maturity date — you may be charged an early withdrawal penalty, which can reduce your earnings. When the CD matures, there is a short grace period (generally 7-10 days) during which you can renew the CD, transfer the money elsewhere or withdraw your funds.²

You might also choose to start a CD ladder — a savings strategy where you spread your money across multiple CDs with staggered maturity dates. For example, you might divide your funds into CDs maturing in 6 months, 1 year and 2 years. With this approach, your money isn’t all locked away at once. As each CD matures, you can withdraw funds or reinvest your money elsewhere for a higher interest rate.³

Because of the withdrawal restrictions, CDs are best for savings you won’t need to access right away. They offer a predictable way to earn interest while helping you stay committed to your savings goals.

What are the pros and cons of a CD?

Before opening a CD, it’s a good idea to understand the advantages and disadvantages. CDs can help you grow your savings, but they also have some limits. Here’s a breakdown of the pros and cons to help you decide if a CD is right for you.

Pros

Let’s take a look at some of the benefits of CDs.

Safety and insurance

As long as you choose a bank or credit union insured by the FDIC, a CD can be considered one of the lowest-risk savings options. The FDIC is a government agency that protects bank depositors if the bank fails. At FDIC member banks, your total deposits — including CDs and other accounts — are protected up to $250,000 per depositor.⁴

Fixed interest rates

CDs offer a fixed interest rate for a set period, so you know how much your money will grow. Even if other interest rates go down, you’ll still receive the interest rate promised in your CD disclosure statement.⁵

Higher interest rates

In many cases, CDs offer higher interest rates than traditional savings or money market accounts (accounts that combine features of savings and checking accounts).⁶

Goal-oriented saving

CDs may help you boost your savings for specific financial goals that have clear timelines.

For example, let's say you want to buy a house in a year. By putting your savings into a one-year CD, you could earn guaranteed interest that may help you make a larger down payment when you’re ready to make an offer.

Cons

Here are a few drawbacks of CDs to consider.

Limited access to funds and early withdrawal penalties

If you don’t have much money in your emergency fund, it may be better to focus your savings there before “locking” your money into a CD. Consider building up an emergency fund for 3-6 months of expenses first, so you still have easy access to your savings.

You can't withdraw money before the maturity date from a CD without penalties. Depending on the financial institution, these penalties usually equal 90 to 365 days of interest that you would have earned if you had left the money in the CD.⁷

Risk of missed opportunity

Remember, CD interest rates are typically fixed and don’t change. If interest rates rise during your CD’s term, you may not be able to move the money in your CD to a new account to take advantage of them (unless you want to pay the penalty for early withdrawal).

Automatic rollover risk

When a CD matures, the bank gives you a short grace period to withdraw your money, transfer it to another account or choose to deposit it in another CD. If you don’t act within that timeframe, the bank typically will automatically roll your CD into a new one, which may have lower rates.⁸ As your CD’s maturity date nears, your bank will typically send you a reminder to remember to withdraw your funds before they roll over. It may also be helpful to set up a calendar reminder, so you can remember these dates in case your bank fails to notify you.

Lower potential returns

While CDs are considered a low-risk investment, they may have a lower return potential compared to other investments.⁹

How to choose the right CD for you

Not all CDs are the same, so it’s important to review and understand the details of each before choosing one. When you’re considering opening a CD, the bank or credit union will give you a document called a disclosure statement that outlines the specifics of each CD they offer. You can then use this document to compare the details of different CDs offered by different institutions to help you decide which one is best for your needs.

A disclosure statement should include key information about the CD, such as:

• Term length: How long you agree to keep your money in the CD
• Maturity date: The date you may withdraw your money without penalty (and the date when a CD will automatically renew, if applicable)
• Renewal or rollover policy: Whether the CD will automatically renew or roll over into a new CD, and under what terms
• Interest rate and APY: How much interest you’ll earn during the term and the total amount of interest earned on the CD in one year
• Frequency of interest payments: Whether the bank will pay interest daily, monthly, quarterly or yearly
• Early withdrawal penalties: The amount of fees you’ll have to pay if you take your money out before the term ends
• Deposit: Whether the bank or credit union requires a minimum deposit to open a CD
• CD type: Whether the CD offers special features, such as a rate increase during the term or no penalty for early withdrawal.

CDs, savings and money market accounts

CDs, savings accounts and money market accounts can all help grow your savings — but they all work differently. Let’s look at the distinct features of each so you can choose the account (or combination of accounts) that best supports your goals.

CDs

• Fixed interest rate: Your interest rate is locked in for the entire term, providing predictable growth.
• Term commitment: You agree to keep your money in the CD for a set period (e.g., 6 months to 5 years). If you withdraw money early, you may pay an early withdrawal penalty.
• Potential for higher returns: Generally, CDs offer higher interest rates than traditional savings accounts, especially for longer terms and bigger dollar values, so your savings may grow more in a CD than in a traditional savings account.

Savings accounts

• Easy access: You can withdraw funds more flexibly than with a CD. For this reason, savings accounts are usually better for emergency savings.
• High-yield options: High-yield savings accounts (HYSAs) offer higher interest rates than traditional savings accounts. Their rates fluctuate due to actions taken by the Federal Reserve, which may or may not be favorable.
• Transaction limits: Some savings accounts may limit how many withdrawals you can make per month without fees.¹⁰

Money market accounts

• Hybrid features: Money market accounts combine elements of checking and savings, often including check writing or debit card access — but they may also limit the number of monthly purchases or transfers you make.¹¹
• Variable interest rates: Money market account rates may vary with market conditions.
• Higher minimums: Some accounts require higher minimum balances to earn the best rates or avoid fees.

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A low-risk option for long-term savings

Whether you're saving for a vacation or a new car, a certificate of deposit with a fixed interest rate may offer peace of mind that your money is growing steadily and safely. However, a CD might not be the best fit if there’s a chance you’ll need access to the funds before your term ends. As always, it’s important to consider your current financial situation, including other available cash, carefully before deciding to open an account.

A strong savings strategy balances steady growth with flexibility. While CDs can help you work toward long-term goals, having access to liquid funds for unexpected expenses is just as important. Using a mix of options—such as CDs for growth and a traditional savings account for everyday access — may help you stay on track and be better prepared for whatever comes your way.

Source

1.https://www.nerdwallet.com/article/banking/how-to-open-a-cd
2,8. https://www.nerdwallet.com/article/banking/when-your-cd-matures
3,6. https://www.bankrate.com/banking/cds/what-is-a-cd/#What-happens-when-a-CD-matures
4. https://www.investor.gov/introduction-investing/investing-basics/investment-products/certificates-deposit-cds
5. https://www.bankrate.com/banking/cd-vs-savings/#rate-comparison
7. https://www.bankrate.com/banking/cds/cd-early-withdrawal-can-come-at-a-high-price/
9. https://www.investor.gov/additional-resources/information/youth/teachers-classroom-resources/risk-and-return
10. https://www.experian.com/blogs/ask-experian/high-yield-vs-traditional-savings-account/
11. https://www.nerdwallet.com/article/banking/faq-money-market-account