A Certificate of Deposit (CD) is a type of savings account offered by banks and credit unions that pays a fixed interest rate for a specific period of time, called the term. When you open a CD, you agree to deposit a certain amount of money for a predetermined length of time—typically ranging from 3 months to 5 years.
How Do CDs Work?
When you purchase a CD, you're essentially lending money to the bank or credit union in exchange for guaranteed interest. In return, you receive a fixed Annual Percentage Yield (APY) that's typically higher than traditional savings accounts. The longer the term and the larger your deposit, the higher the rate you can usually secure.
Key Benefits of CDs
- Guaranteed Returns: Your interest rate is locked in for the entire term, protecting you from rate decreases
- FDIC/NCUA Insured: CDs are insured up to $250,000 per depositor, per institution
- Higher Rates: CDs typically offer higher interest rates than regular savings accounts
- Low Risk: One of the safest investment options available, ideal for conservative investors
- Predictable Growth: Know exactly how much your money will grow by the maturity date
Things to Consider
Before opening a CD, consider that your money will be locked in for the term length. Early withdrawals typically result in penalties that can eat into your earned interest. Make sure you won't need access to these funds before the CD matures. Also, compare rates across multiple institutions—online banks and credit unions often offer the best CD rates today.