What is a Certificate of Deposit?

A certificate of deposit (CD) is a type of time deposit which pays interest over a fixed term lasting anywhere from 1 month to 10 years. The annual percentage yield (APY) of a CD goes up with longer terms, and in some cases also increases with larger deposits. Withdrawing money from a CD prior to the end of its term (i.e. its maturity) incurs penalties that can cost you months of accrued interest.

How Do Certificates of Deposit Work?

Essentially, a CD is a loan that you can make to a bank for a fixed term at a predetermined rate of interest. While CDs are considered to be deposit accounts like a regular checking or savings account, you cannot withdraw money from a CD whenever you choose. If you take money out of a CD before the end of the term, you'll have to pay an early withdrawal penalty that is usually deducted from the interest that you'd otherwise earn.

Banks offer CDs in various term lengths, with longer terms earning higher rates of interest. This compensates the account holder for the longer amount of time that the money will be locked down by early withdrawal penalties. Credit unions also offer CDs, but sometimes refer to them as share certificates.

CD Rates by Term Length

We examined the rates for standard CDs among major banks, disregarding bonuses like relationship rates and promotional boosters. The listed APYs are for deposits of at least $1,000 and under $10,000, although some banks may require minimum opening deposits that are higher or lower than $1,000.

Term Length (months)136121824364860120
Capital One--0.40%0.75%0.90%1.10%1.10%1.10%1.25%-
PNC Bank0.05%0.05%0.06%0.15%0.18%0.25%0.30%0.50%0.60%1.10%
TD Choice-0.10%0.15%0.25%0.30%0.35%0.40%-0.65%-
US Bank0.05%0.05%0.05%0.10%0.15%0.20%0.35%0.50%0.75%-
Wells Fargo-0.10%0.10%0.50%------

Each bank sets its own scale for CD rates. Some only offer a few different term lengths, while others like Chase use a continuous scale of months, with multiple brackets of time each earning a different rate.

A few banks also increase the APY of a CD based on the size of your deposit. You can boost your rate at both PNC and TD Bank by meeting certain balance thresholds on the CD. While these bonuses can help boost your growth in savings, pouring more funds into a CD just to attain a slightly better rate is inefficient and inconvenient. Your savings strategy should focus on the management of term lengths to ensure that your CDs are maturing in a timely fashion.

CD Early Withdrawal Penalties

The main drawback of CDs is that in exchange for a higher APY than a money-market or savings account, you cannot access the deposit without penalty before the end of the CD’s term. With most CDs, withdrawals made prior to maturity trigger an early withdrawal penalty, which can cost 3 to 6 months of earned interest on the CD.

Unless you have an urgent need, you should avoid withdrawing funds from a CD before it matures. This makes it important to consider how much you are willing to put into a CD, and for how long, well before you make the actual deposit. A few types of CDs on the market allow you one penalty-free withdrawal, either over the whole term or once per year on the anniversary of the CD opening.

Special Types of CDs

While most CD offerings are similar in design, a few modify the conditions of withdrawal or the behavior of the rate over time. Online CDs are also listed here due to their high average APY.

Step Rate CD

Also called rising rate CDs, step rate CDs offer periodic increases in their interest rates, along with the option to withdraw some of your money on the date of each increase, without penalty. Some step rate CDs allow for complete withdrawal on these dates, while others require that you maintain at least the minimum opening deposit. Banks advertise the blended or composite APY for these CDs, which is the overall yield you can expect if you make no withdrawals for the entire term. Step rate CDs generally require higher minimum deposits in exchange for their increased flexibility.

Online CD

As with many other banking products, online-only banks are able to offer CDs with much better rates than traditional institutions, thanks to their low operating costs. More recently, major banks have responded by establishing online offerings of their own, with similarly higher rates and restricted access to brick-and-mortar services.

The online model of banking can feel limited when it comes to other account types due to a lack of physical branch locations and ATMs, but in the case of CDs this does not matter: ideally, you will not need to touch a CD until it matures, making the high-interest, low-service online banking model a good fit for CDs.

Promotional Rate CD

Some banks offer unusually high rates for select terms and higher deposits. These terms are often presented in their own category, and they sometimes add a few extra months to the usual term lengths. Make sure to find out whether a promotional rate comes with any caveats, such as a sudden drop to “standard” rates midway through the term.

No-Penalty CD

Also known as breakable CDs, these certificates allow you one penalty-free withdrawal prior to the end of the term, but tend to be rare and limited in the range of term lengths available. They often come with a number of other prerequisites like higher opening deposit requirements or an associated checking account at the same bank.

Market-linked CD

Market-linked certificates of deposit have been increasing in popularity, but their returns are calculated quite differently from those on other types of CDs. As the name implies, market-linked CDs grant a rate of return based on the current state of a designated security or market index, meaning that your earnings in interest will rise and fall along with the state of the linked securities. In this sense, they resemble financial derivatives more closely than they do true certificates of deposit. While the basic premise is simple, a variety of fees and conditions make market-linked CDs a highly complex investment whose gains and losses can be difficult to understand.

Certificates at Credit Unions

Credit unions offer their own type of CD, known as a share certificate or simply a certificate. Most credit unions do not offer certificates with terms shorter than 3 months or longer than 5 years. Compared to CD rates at commercial banks, the APY for share certificates are higher at any term length for which they are available: among the top 20 credit unions by total deposits, the average APY for a 1-year share certificate under $10,000 was 0.69%, compared to an average of 0.26% for the 1-year CDs listed above.

While these rates are much more favorable, the drawback is that credit unions are not open to everyone: because they are not-for-profit associations meant to promote the financial well-being of specific communities, you must meet the specific regional, occupational or fraternal requirements for becoming a member at any one credit union. Recently, some of the largest credit unions have made it much easier to obtain membership, but because it is often efficient to keep all your deposit accounts at one institution, you should weigh the benefits of banks vs. credit unions instead of joining to access a single product.

Certificates of Deposit as Part of Your Savings Plan

Like any other type of U.S. deposit account, CDs are FDIC-insured to a maximum of $250,000, making them very safe places for your money. If you have money to spare for an investment but wish to avoid all risk, a CD is a safe and convenient choice — especially if your current bank offers bonus CD rates to customers who already have other accounts. If the rates at your bank are too low for your savings plan, many online CDs offer APYs of 1.00% or more, and since an ideal CD is one with zero activity until maturity, the service limitations of online banking will not inconvenience you. That said, you should also consider taking steps to keep some money in a more flexible savings account in case of emergency.

Laddering Certificates of Deposit

A common response to inflexibility in an investment product is to opt for multiple smaller investments with staggered maturity dates. With CDs, “laddering” your investment into several CDs whose terms end one after another ensures you will never have to wait long for at least one deposit to be available for withdrawal. Besides allowing you more frequent access to a portion your funds, laddering minimizes the degree to which your earnings suffer from changes in interest rates, because a portion of your investment is always coming up for renewal at current rates. Either that portion will improve your earnings rate overall, or it will be the only part of your investment to drop in interest rate, with CDs that mature later continuing to earn at the older, higher rate.

Automatic Renewal

Automatic renewal or rollover occurs when you fail to take action with the deposit upon maturity, at which point the bank will roll the deposit over into a new CD with an identical term length at the prevailing rate. In most cases, this means that any promotional rate you received in your first term will be replaced by a lower, standard rate following the renewal. Though automatic renewal may seem convenient within a laddering scheme, if you simply happen to forget about a lone CD you expected to collect, it can cause problems with accessing your money.

Banks are required to give written notice when a CD is close to maturity, and allot you a grace period (usually 7 to 10 days) in which to withdraw or deposit money into a renewed CD. Nevertheless, you should keep track of your own CDs and maturity dates, or you may find your deposit locked into a CD for as twice as long as you originally intended, and possibly at a lower rate than before.