When does a CD make sense for you?

With rates on the rise, and stocks as volatile as ever, CDs are a popular destination to park cash you don’t need right away.  

You’re guaranteed to get your initial deposit back along with interest. And if the insured bank or credit union holding the deposit fails, up to $250,000 of your funds is covered by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), an important security blanket given recent massive bank collapses.

Yet, CDs have drawbacks, too: they aren’t liquid, often have balance requirements and, on average, earn a lower rate of return than stocks or bonds over the long-haul.

Therefore, have a particular purpose in mind before opting for one.

When to consider opening a CD

When rates are high

Earning interest is one of the main reasons to open a CD, which offers a fixed rate of return for a set period of time. 

This doesn’t mean that you should empty your accounts though. Keep enough in savings so that you can cover against a rainy day.

“[Be sure that] you can part with access to the funds for the term of the CD,” said Lawrence Sprung, CFP and author of “Financial Planning Made Personal.”

If you want to earn more interest than a traditional savings account offers and still keep your assets liquid, take a look at high-yield savings accounts. 

When you have a savings goal

If you’ve earmarked some funds for an upcoming expense, like a down payment on a home, a vacation or a wedding, a CD can help you store the funds until you’re ready to use them.

When you want to control your spending

It can be tempting to dip into your savings if it’s readily accessible. If you’re not careful, you could even spend half of your vacation fund by accident. A CD can put some distance between you and your funds.

If you’re looking for a budget management method and don’t mind going old school, check out budget binders.

Pros and cons of owning a CD

Pros

• Deposit insurance. Your CD funds are guaranteed up to $250,000 per depositor, per account ownership category, per insured financial institution. This means you could have multiple CDs across several banking providers and have your entire investment amount insured. 
• Predictable returns. You often have options on when to receive the CD interest. You could choose to reinvest the interest as you go and only receive the payout when the CD matures, or to receive it according to a schedule: monthly, quarterly, biannually or annually. 
• Better returns than other deposit accounts. CDs usually provide higher yields than other deposit vehicles, like money market accounts and high-yield savings accounts.

Cons

• Minimum deposits may apply. Many banks require you to deposit a minimum amount, such as $1,000, to open the account. 
• Limited liquidity. CDs typically don’t allow you to withdraw your money at a moment’s notice; at least, not without a penalty. For example, you could pay 90 days’ worth of interest to withdraw a one-year CD early.
• Can miss out on rate hikes. If you’ve locked yourself into a 12-month CD at 2%, and then rates rise and your bank now offers 2.50%, you’re simply out of luck. 

Choosing the best term length for you

CD terms vary, but can range from 28 days to 10 years. Most banks offer CDs with terms from six months to 60 months. 

If you have a savings goal, the term should align with it. For example, if you’re heading out on vacation next year, then you might choose one of the best one-year CDs. 

If you don’t have a time-specific goal, you may feel a little lost. The shortest CD terms don’t give you a lot of time to earn interest, while the longest terms may be unfavorable because they keep your money out of reach over the long haul. 

CD laddering may be the sweet spot.

In a CD ladder, you choose several terms of various lengths. A one-year, two-year and three-year CD, for example. Then as the shorter-term ones mature, you reinvest them into three–year CDs. This way, you can take advantage of the traditionally higher rates on longer-term CDs and still have large amounts of your investments coming available each year. 

This rolling strategy also provides flexibility in a rising-rate environment. 

How to open a CD account

When you’re ready to open your CD account, here are the general steps you’ll take.

1. Compare financial institutions. Check out CDs at several federally insured banks and credit unions. Comparing terms, rates, minimum deposits and penalties can help you find the best CD for your situation. 
2. Choose your CD term and initial deposit. The term should coincide with your savings goal, and you’ll want to make sure you have enough cash to meet any minimum deposit requirements. But don’t go over the $250,000 limit at one bank if you want the security of FDIC or NCUA insurance. 
3. Determine how you’ll apply. Depending on the financial institution, you may be able to open the CD online, over the phone or in person. If you apply online, the process can be as short as five minutes. 
4. Fill out the application. If you’re not already a customer or a member of the CD provider, you’ll need to give your personal information, including your full name, date of birth, Social Security number and contact information.
5. Make the opening deposit. You could fund the account by transferring money from another account, mailing a check or depositing cash or a check. You’ll need the entire amount upfront, since CDs usually won’t let you add money after making the opening deposit. 

Current CD rates available by bank

Every bank and credit union has a different way of setting CD rates, so it’s important to compare them before opening an account. See table below for the one-year CD terms for: Bank of America Featured CDs, Capital One 360 certificates of deposit, Chase relationship certificates of deposit and Citi® Certificates of Deposit.

FINANCIAL INSTITUTION	APY* FOR 1-YEAR CD
Bank of America	4.90% (13-month featured CD)
Capital One 360	4.50%
Chase	2.00% (relationship rates)
Citibank	4.00% (varies by deposit amount)

See MoreSee Less

^{Rates accurate as of January 29, 2024 for deposits less than $10,000. Rates can vary by zip code; these correspond to 07030.}

Alternatives to a certificate of deposit

If giving up access to your money doesn’t sound appealing, here are some alternatives to check out.

High-yield savings account

Savings accounts allow you to make deposits and withdrawals anytime, unlike a CD, where you lock up your money for the specified term. Plus, high-yield savings accounts typically offer APYs about 10 times the national average. 

But read the fine print in your account agreement; the bank or credit union may impose limits on the number of times you can withdraw money each month.

Money market accounts

Like savings accounts, you can make deposits and withdrawals anytime with a money market account. They have similar monthly transaction limits, but there are two key differences between MMAs and savings accounts. 

MMAs allow you to write checks and use a debit card when you need your funds, and the rate you earn on an MMA may fluctuate based on your account balance. 

Frequently asked questions (FAQs)