Different types of CDs: What are they and how do they work?

Certificates of deposit (CDs) let customers earn interest on their deposits, typically at higher rates than savings accounts. However, not all CDs are made equal. 

Different types of CDs like bump-up, step-up, no-penalty, jumbo and brokered CDs provide options beyond the traditional. Which is best depends on your preferences and goals.

Annual percentage yields (APYs) and account details are accurate as of July 12, 2024.

What is a CD?

To break it down, a deposit is a sum of money kept at a bank, credit union, broker or other financial institution. A certificate of deposit is when you agree to not touch a deposit for a specified period of time in exchange for a yield. 

You could think of it as providing a loan to the bank. 

Most CDs have predetermined lifespans ranging from a few months to several years, during which it earns a fixed interest rate. No matter what the market does, you’ll earn that yield until the CD matures. This stability is bolstered by the fact that if you get a CD from a bank that is covered by the Federal Deposit Insurance Corp. (FDIC) or from a credit union insured by the National Credit Union Administration, your deposits are protected for at least $250,000.

This makes CDs ideal for risk-averse investors or a great conservative balance to a portfolio.

The catch is that during a CD’s term you typically cannot withdraw money without incurring significant penalties. These fees are expressed as how many days of interest you’ll have to give up, such as 90 days’ interest on a three-month CD. Longer terms tend to carry greater early withdrawal penalties. Depending on the provider, the penalty may also reduce your principal if you haven’t yet earned enough interest to cover the fee. 

When a CD matures, you’ll have a grace period, in which you can withdraw part or all of your funds without penalty. In many cases, if you don’t withdraw your money during the grace period, your funds are rolled into a new CD of the same term. You’ll earn whatever the current rate is, which may not be competitive. It can pay to shop around for the best rates every time one of your CDs matures.

How do I open a CD account?

You can open a CD account at banks, credit unions, brokers and other financial institutions. Accounts can be opened online or in person if physical branches are available. Generally, you can open a CD in just a few minutes.

To open any type of financial account, you must fill out basic information, providing your name, address and Social Security number. Once you open your account, you can typically fund it with a linked checking account at the same financial institution, with an online or phone transfer from another institution or by mailing a check. You can often set up online access for easier account management.

Many CDs have a minimum deposit requirement, typically ranging from $100 to several thousand dollars. Some institutions have a tiered system with different rates for different deposit amounts. Review your CD’s terms to ensure you are getting the best rate.

Choosing the best CD for your financial needs

With so many CDs available, choosing the right one for your financial needs is important.

• Traditional CD: This is the basic, most common type of CD. You leave your money with a financial institution for a preset period, earning a fixed interest rate.
• High-yield CD: Although it goes by a different name, a high-yield CD is structurally the same as a traditional CD, but it offers an especially competitive yield. They are typically available from online banks.
• Bump-up CD: A bump-up CD allows you to increase the yield if interest rates go up, usually only once during the term. The rates on these CDs often start lower, though.
• Step-up CD: Similar to a bump-up CD, your rate increases automatically at a preset amount at different points during the term if the conditions are met. Pay attention to the “blended yield” which is the APY you’ll earn overall.
• Jumbo CD: As the name suggests, these are larger than traditional CDs. The minimum deposit can be quite high, often $100,000. In return, you should get a higher yield, but this isn’t always the case.
• No-penalty CD: These CDs allow you to make withdrawals during the term without a penalty. In exchange for this flexibility, you often must accept a lower yield.
• Brokered CD: A brokered CD is one you buy from a stock broker and hold in a brokerage account. Examples include E*TRADE Brokered certificates of deposit, Vanguard brokered certificates of deposit and Charles Schwab certificates of deposit. They can offer competitive rates, but liquidity could be problematic as you can’t make early withdrawals (instead you have to resell it) and they aren’t always FDIC-insured.
• Add-on CD: This type lets you add more money to the CD after you open the account, which is not allowed in other CDs. However, the number of add-on deposits may be limited.

Different CD rates to consider

The general rule is that longer-term CDs carry better rates since longer terms help make banks’ balance sheets more predictable and since they require greater commitment. But this isn’t always the case. 

Currently, CDs with terms shorter than two years carry the highest yields, but locking in what’s still a relatively high yield for a longer period of time can be advantageous. If you can’t decide between a short- and long-term CD, you could split your funds and get both.

CD laddering is a savings strategy in which you invest in multiple CD terms so that you have flexibility — with your funds becoming available at different times — and so you don’t miss out on great yields. 

The CDs you will see most commonly include traditional, high-yield and jumbo CDs with terms between three months and five years.

Three-month CD rates

Due to the high federal funds rate, three-month CDs currently carry some of the best rates available. For instance, Fidelity certificates of deposit has a three-month CD with a 5.25% yield and whole CD for a minimum of $1,000 or buy CD fractions in increments of $100, though, if you can commit at least $1,000, Charles Schwab offers a 5.41% APY.

Six-month CD rates

While six-month CD rates are currently slightly lower than three-month rates, some great options are still available. Sallie Mae certificates of deposit have a six-month term with a 4.80% APY and a minimum deposit of $2,500. The My eBanc Online Time Deposit has a six-month CD with a 5.20% yield and a $5,000 minimum.

One-year CD rates

Not touching your funds for a full calendar year can net you some of the highest yields. The best one-year CDs include a 5.25% yield from Bread Savings certificates of deposit and 5.30% from My eBanc. You’ll need at least $1,500 for the first and $5,000 for the second. 

18-month CD rates

Top 18-month CDs feature a 4.50% yield for a $1,000 minimum deposit on Alliant Credit Union share certificates and 5.00% APY for the same $1,000 minimum on the CommunityWide Federal Credit Union CW certificate account, though offers may vary by state.

Two-year CD rates

CDs with terms of two years or more have lower yields in most cases today, but they’re still great compared to the minimal yields you’d earn a few years ago. My eBanc’s two-year term has a 4.85% yield, Sallie Mae offers 4.50% APY with a $2,500 minimum and the Marcus by Goldman Sachs High-Yield certificates of deposit features a 4.40% APY with just a $500 minimum.

Three-year CD rates

If you’re looking for the best yield for three-year CDs, consider First Internet Bank certificates of deposit, which has a 4.61% APY and a $1,000 minimum deposit. Other notable options include the Synchrony Bank certificates of deposit and the Ally Bank High Yield certificates of deposit which both don’t have minimum deposit requirements. Respectively they offer 4.15% and 4.00% APY.

Five-year CD rates

Some financial institutions feature strong rates even for five-year CDs, allowing you to lock in a high yield for years to come. One of the best rates is on the First National Bank of America certificates of deposit, which has a 4.50% APY with a $1,000 minimum deposit. If you prefer a no-minimum deposit option, the Barclays Online certificates of deposit and Capital One 360 certificates of deposit offer rates of 3.75% and 3.90% APY, respectively.

10-year CD rates

Believe it or not, you can still find a good APY on a 10-year CD term. The Apple Federal Credit Union share certificate offers 3.81% with just a $500 minimum deposit. Discover® Certificates of Deposit offer a 3.75% yield with a $2,500 minimum deposit.

Frequently asked questions (FAQs)