certificate of deposit

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 untouched for that set term, the bank typically pays you a higher interest rate than you would earn in a regular savings account. Terms generally range from a few months to five years or more.

When the term ends, which is called the maturity date, you receive your original deposit plus the interest earned. In most cases, withdrawing your money before the maturity date results in an early withdrawal penalty, which can reduce or eliminate the interest you earned. Because of this, CDs are generally best suited for money you are confident you will not need in the short term.

Why it matters

CDs can be a useful tool for people who want a low-risk place to grow their savings. Because the interest rate is locked in at the time you open the account, you know exactly how much you will earn by the end of the term. This predictability makes CDs a popular choice for goals like saving for a home purchase or building an emergency reserve you want to keep separate from everyday spending.

CDs at banks are typically insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per institution. Credit union CDs are generally insured by the National Credit Union Administration (NCUA) under the same limits. This insurance makes CDs one of the safer savings options available to consumers.

Example

Suppose you have $5,000 you do not plan to use 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, giving you a total balance of $5,225. If you had kept that money in a standard savings account earning 0.50% APY, you would have earned only about $25 over the same period.

Related terms

• Annual Percentage Yield (APY)
• Maturity date
• Early withdrawal penalty
• High-yield savings account
• CD ladder