If you’re looking for a low-risk way to grow your savings, a Certificate of Deposit (CD) might be worth considering. CDs are offered by banks and credit unions and are known for being one of the safest places to put your money. In exchange for leaving your money untouched for a set period, you usually earn more interest than you would with a regular savings account.
That safety and higher return come with one main condition: your money is locked in for a specific amount of time. If you need to withdraw it early, you’ll likely pay a fee.
Let’s break down how CDs work, the different types available, and when they make sense for your finances.
What Is a Certificate of Deposit?
A CD is a type of time-based deposit account. When you open one, you agree to leave your money with the bank for a fixed period this could be a few months or several years. That period is called the term.
In return, the bank pays you interest at a set rate, known as the annual percentage yield (APY). Because the bank knows it can rely on your money for that entire term, it can offer a higher rate than a typical savings account.
Example:
If you deposit $2,000 into a 12-month CD at 4.50% APY, you’ll earn more interest than if that same $2,000 sat in a standard savings account paying 1%.
How CDs Actually Work
When you open a CD:
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You choose how much money to deposit.
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You select a term (for example, 6 months, 1 year, or 5 years).
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Your interest rate is usually locked in for the entire term.
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At the end of the term called the maturity date you decide what to do next.
Most CDs do not allow free withdrawals before maturity. If you break the agreement early, the bank charges an early withdrawal penalty, often equal to several months of interest.
How to Open a CD
You can open a CD through:
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A traditional bank
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A credit union
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An online-only bank
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A brokerage account (for certain types of CDs)
Most banks let you open CDs online in just a few minutes. Before committing, ask about:
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Early withdrawal penalties
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Minimum deposit requirements
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Special CD options with added flexibility
Once funded, your CD will appear as a separate account on your bank statement or online dashboard.
Important:
Make sure the CD is insured by the FDIC (for banks) or the NCUA (for credit unions). This protects up to $250,000 per depositor, per institution.
Common Types of Certificates of Deposit
Not all CDs work the same way. Here are the most common options you’ll see in the U.S.
No-Penalty (Liquid) CDs
These CDs let you withdraw your money early without paying a penalty, usually after the first few days.
Pros:
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More flexibility
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Useful if interest rates are rising
Cons:
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Lower interest rates than standard CDs
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Often require larger minimum deposits
Bump-Up CDs
A bump-up CD allows you to switch to a higher interest rate if your bank raises rates during your term.
Things to know:
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You usually must request the rate increase
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The number of bump-ups is limited
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Starting rates are often lower than regular CDs
These work best if rates rise significantly while your CD is active.
Step-Up CDs
Step-up CDs increase your interest rate on a fixed schedule, such as every six months. You don’t need to request anything the increases happen automatically.
They offer predictability but often start with lower initial rates.
Brokered CDs
Brokered CDs are purchased through investment accounts instead of directly from a bank. They allow you to compare CDs from many banks in one place.
Risks to consider:
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Selling early can be difficult
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Some brokered CDs lack FDIC insurance
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Pricing may fluctuate if sold before maturity
Always confirm insurance coverage before buying.
Jumbo CDs
Jumbo CDs require large deposits usually $100,000 or more and often pay higher interest rates.
They’re commonly used by individuals or businesses with substantial cash reserves. FDIC insurance still applies, up to $250,000.
What Happens When a CD Matures?
When your CD reaches its maturity date, the bank will notify you and offer options such as:
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Renewing into a new CD
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Moving the money to savings or checking
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Switching to a different term length
If your CD has automatic renewal and you take no action, the bank will roll your money into a new CD possibly at a different rate.
If you want to make changes, act before the renewal deadline.
Using a CD Ladder Strategy
A CD ladder helps you earn higher rates without locking up all your money at once.
How it works:
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Split your money across multiple CDs with different maturity dates.
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As each CD matures, reinvest it into a longer-term CD.
Example:
You invest $5,000 by placing $1,000 into five CDs that mature one year apart. Each year, one CD becomes available, giving you access to cash while still earning long-term rates.
This strategy reduces early withdrawal penalties and interest-rate risk.
CDs vs. Savings Accounts
CDs often pay more interest than savings accounts, especially if you don’t need immediate access to your money.
However:
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Savings accounts are better for emergency funds
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CDs are better for money you won’t need soon
A common approach is to keep emergency savings in a regular account and place excess cash into CDs.
Pros and Cons of Certificates of Deposit
Advantages
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Very safe: FDIC or NCUA insurance protects your money
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Higher interest: Better returns than checking or basic savings
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Predictable earnings: Fixed rates mean no surprises
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Easy to compare: Rates vary widely, especially online
Disadvantages
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Limited access: Early withdrawals usually cost money
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Rate risk: You may miss out if interest rates rise
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Inflation impact: Returns may not keep up with rising prices
CDs are best used as part of a broader financial plan not the only place you invest.
Frequently Asked Questions
Why do CDs usually pay more than money market accounts?
CDs restrict access to your money, which allows banks to use those funds more freely. In exchange for that inconvenience, they offer higher interest rates.
Are CDs really safe?
Yes as long as they are FDIC- or NCUA-insured. If the bank fails, your insured CD principal is protected by the federal government.
Final Thoughts
Certificates of Deposit are a solid choice for people who value safety, predictability, and steady returns. They’re not exciting, but they’re reliable and that’s often exactly what savers want.
If you have money you won’t need for a while and don’t want to take risks, a CD can be a smart, stress-free option.
