CD

Certificate of Deposit (CD)

A certificate of deposit, commonly called a CD, is a type of savings account offered by banks and credit unions that holds a fixed amount of money for a fixed period of time. In exchange for agreeing to leave your money in the account for that set period, the bank typically pays you a higher interest rate than you would earn on a regular savings account. Terms generally range from a few months to five years or more.

When you open a CD, you agree to a maturity date, which is the date your term ends and your funds become available again. In most cases, withdrawing money before that date results in an early withdrawal penalty, which can reduce some or all of the interest you have earned. At maturity, you can typically withdraw your principal plus interest, or roll the funds into a new CD.

Why it matters

CDs are generally considered a low-risk savings tool because they are insured by the Federal Deposit Insurance Corporation (FDIC) at banks, or by the National Credit Union Administration (NCUA) at credit unions, up to the applicable limits. This makes them a popular choice for people who want a predictable, guaranteed return on money they will not need access to in the near future.

Because the interest rate on a CD is locked in at the time of opening, your earnings are not affected by market fluctuations. This predictability can make CDs a useful part of a broader savings strategy, particularly for short-term financial goals.

Example

Suppose you have $5,000 that you do not need for the next 12 months. You open a 12-month CD at your bank with an annual percentage yield (APY) of 4.50%. At the end of the term, you would earn approximately $225 in interest, bringing your total balance to $5,225. If you had needed to withdraw the money three months early, the bank would typically charge an early withdrawal penalty, reducing your overall earnings.

Related terms

• Annual Percentage Yield (APY): the real rate of return earned on a deposit account, taking compounding into account.
• Maturity date: the date on which a CD term ends and funds can be withdrawn without penalty.
• Early withdrawal penalty: a fee charged for taking money out of a CD before its maturity date.
• High-yield savings account: a savings account that typically offers a higher interest rate than a standard account, but allows more flexible access to funds.
• CD ladder: a savings strategy that involves opening multiple CDs with staggered maturity dates to balance higher returns with regular access to funds.