CD rates haven’t been this high in years. The Federal Reserve has been raising interest rates all year to fight inflation, pushing the annual percentage yield on CDs to attractive levels. If you’re looking for a CD, consider opening one with a federally insured issuer listed below.
Shopping for the best CD rates
To find a CD that best meets your needs, shop for one that combines the best available rate, a term that matches your savings goal, and a minimum deposit that fits your budget. You should also consider term length and early withdrawal penalties in case a financial emergency comes up.
Look for a bank, credit union, or neobank that offers a CD that works for you, and then evaluate other factors such as branch locations, a robust online banking app, plentiful customer service options, and easy-to-follow instructions for opening and closing a CD.
The term of a CD affects the amount of interest — or annual percentage yield — you’ll be offered. APYs offered on CDs rise as terms increase from short to medium term. But longer terms don’t always mean the highest CD rates. In the current market, average interest rates increase between 1-month and 1-year CDs.
What is a CD?
A certificate of deposit, called a CD for short, is a type of savings account you can incorporate into your personal finance savings strategy. You can open a bank CD by depositing a lump sum with a traditional or online bank. Credit unions offer CDs too, called share certificates.
While CDs earn compound interest similarly to deposit accounts such as savings accounts, high-yield savings accounts, money market accounts, and even some checking accounts, CDs have higher interest rates. In exchange for this more competitive, fixed APY, you must agree to leave your cash in the bank for a set period of time, called the CD’s term.
Unlike traditional savings or checking bank accounts, the money you put into a CD isn’t readily available to you. If you decide to withdraw funds from a CD before its maturity date, your bank may charge you a penalty for accessing your money early. An early withdrawal penalty could offset some or all of the interest you earn on a CD. In some cases, you could even lose part of your initial deposit.
Picking the right CD could come down to finding the highest APY for the term you’re seeking. But you should also research early withdrawal penalties in case an emergency comes up, and you need to access your money before the term ends.
Pros and cons of a CD account
You’ll typically pay a penalty if you need your cash before a CD’s maturity date.
The competitive rates on CDs — especially longer-term CDs — might not keep up with inflation.
The minimum balance needed to open a CD may be too high.
Although CDs are safer, they offer lower returns than mutual funds and stocks.
Types of CDs
In addition to traditional certificates of deposit, there are several other types of CD to consider.
With a bump-up CD, you can request an increase in your APY if interest rates rise at your financial institution before your CD matures. In general, you can only request one rate increase per term with a bump-up CD. Initial APYs on bump-up CDs are often lower.
Step-up CDs are similar to bump-up CDs. However, with a step-up CD, your financial institution will increase your APY at predetermined times.
A callable CD gives the bank the right to terminate the CD before its maturity date. A callable CD might offer a higher APY than a traditional CD.
A no-penalty CD allows you to take funds from your account before the maturity date without paying an early withdrawal penalty. No-penalty CD rates are usually lower than the APYs on traditional CDs.
The interest you earn on bull CDs is tied to a specific market index. If that market index rises, a bull CD will pay you a predetermined percentage in the form of interest. Most bull CDs also feature a guaranteed minimum rate of return.
Bear CDs are also tied to a specific market index, but the returns you may earn from a bear CD are based on shares of any market declines that occur.
With a jumbo CD, a bank requires a larger opening minimum deposit requirement – often $100,000 or more – than it would for a traditional CD. If you don’t have quite enough to meet the minimum deposit, you could put the money you do have into a high-yield savings account or money market account to earn the interest you need to open a jumbo CD.
Uninsured CDs are not insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). Uninsured CDs may offer a higher APY, but think carefully and consider seeking professional advice before you commit to a higher-risk account that isn’t a member FDIC or NCUA. The FDIC and NCUA cover up to $250,000 per depositor and account category if your financial institution fails. You won’t have that safety net with an uninsured CD.
With regular CDs, you have a fixed rate through the entire CD term. When you open a variable-rate CD, the APY can fluctuate with market interest rates. If interest rates increase, you’ll earn more on your savings. But if rates fall, your APY could drop.
Zero coupon CDs
Zero coupon CDs don’t pay interest during their term. Rather, you purchase the CD at a discount. When the CD matures at the end of its term, the bank pays you its full face value.
How to save with CDs
Below are three common CD savings strategies to consider.
CD laddering is a savings strategy that involves opening multiple high-yield CDs with staggered maturity dates. By spacing out the dates at which your CDs mature and then reinvesting your savings into longer-term CDs as your current ones come due, this methodology allows you to maintain access to a portion of your savings at periodic intervals while still earning higher returns than with a savings account.
A CD barbell involves dividing your savings between CDs with long-term and short-term accounts with no medium-term options.
A CD bullet is useful for saving toward a big financial goal. You open several CDs with similar maturity dates with the goal of having money from multiple CDs available at once.
How to choose a CD
When choosing a CD, consider the following factors:
Rates: Banks and credit unions control their rates, so you’ll find that the APYs on CDs can vary widely between financial institutions. Shop around to find the best rates.
Rate type: When looking at your CD options, compare APYs and determine whether the CD has a fixed or variable APY.
Term: CDs can have terms as short as one month; longer-term CDs can have terms as long as 25 years.
Penalties or monthly fees: With a typical CD, you pay a penalty if you withdraw money before its maturity date. You could lose some or all of your earned interest, and even part of your principal in some cases. Also check to see whether or not you’ll be charged maintenance fees
Minimum opening deposit: The minimum opening deposit for a CD will vary by bank or credit union, typically ranging from $500 to $5,000.
How do I decide if a CD is right for me?
CDs aren’t a one-size-fits-all solution for every financial situation. But they can be a solid, low-risk savings option if you’re seeking higher returns than traditional savings accounts may offer.
If you decide to incorporate CDs into your overall savings strategy, shopping around and comparing your options is important. There are many CDs to choose from; some banks offer higher interest rates than others. Once you choose the best CD for you, consider adding some of the strategies above to supercharge your savings and reach your savings goals even faster.
What happens if I don’t withdraw the funds after the CD’s maturity date?
When a CD matures, the bank or credit union will give you a grace period of several days after the maturity date passes. You’ll need to decide whether to withdraw your funds from the CD or or roll it over into a new CD, ideally one with a higher APY if poddible. In most cases, if you do not withdraw your funds and the grace period passes, your bank or credit union will automatically renew the CD.
Are there other savings options available instead of CDs?
Although CDs are increasingly popular, they aren’t the only way to make your money grow. Depending on your financial situation and your goals, you may be better off with one of the following options:
While these savings accounts often have annual percentage yields that are a bit lower than traditional CDs offer, they all give you quick access to your money in an emergency. Accessing your savings easily can help prevent you from relying on credit cards or paying an early withdrawal penalty to access the funds tied up in a CD.
Kat Tretina and Zina Kumok contributed to this article.