CD rates change weekly, and online banks consistently offer higher rates than brick-and-mortar branches
A certificate of deposit (CD) is a savings account where you lock money away for a set time — usually three months to five years — in exchange for a may provide interest rate. The rate you receive depends on three things: the bank or credit union offering it, how long you commit your money, and the current interest rate environment. Online banks and credit unions typically pay 4% to 5.5% on CDs right now, while traditional banks often pay less than 2% for the same term.
The catch is that you cannot touch the money without paying a penalty — usually a few months of interest. That makes CD rates matter most if you have money you genuinely will not need for the term you choose. If you might need it sooner, a high-yield savings account lets you withdraw without penalty, though it pays slightly less.
Shopping for rates takes 15 minutes and can mean hundreds of dollars in extra interest over a few years. Rates shift constantly, so the highest rate today may not be the highest next week.
Key Takeaways
- Online banks and credit unions pay significantly higher CD rates than traditional banks, often 2% to 3% more on the same term.
- CD rates vary by term length — a one-year CD pays differently than a five-year CD, and the difference changes month to month.
- You will owe an early withdrawal penalty if you need the money before the term ends, typically equal to three to six months of interest.
- Comparing rates across at least three to five institutions takes minutes and can add hundreds of dollars to your return.
- The Federal Deposit Insurance Corporation (FDIC) insures CDs up to $250,000 per bank, so splitting money across banks protects larger amounts.
Why online banks pay more than traditional banks
Online banks have lower overhead — no branch staff, no building leases, no tellers. They pass that savings to depositors by paying higher rates on CDs and savings accounts. A traditional bank with 500 branches nationwide cannot compete on rate because it has to cover all that infrastructure.
Credit unions work the same way: they are member-owned, not shareholder-owned, so they return profits to members through better rates. Both online banks and credit unions are insured the same way as traditional banks — up to $250,000 per account holder per institution through the FDIC or the National Credit Union Administration (NCUA).
The tradeoff is convenience. You cannot walk into an online bank or most credit unions to deposit cash or speak to someone in person. For CD purchases, that does not matter much — you fund them by transfer, and you do not touch them again until they mature.
How to compare CD rates across institutions
Start by listing the term you want: three months, six months, one year, two years, three years, or five years. Longer terms usually pay more, but not always — sometimes a two-year CD pays nearly as much as a five-year, which means locking money away longer for almost no extra return.
Then visit the websites of at least three to five institutions. Look for the CD rate table, which will show the annual percentage yield (APY) for each term. Write down the rate and the term side by side so you can see the pattern. A rate table might look like this:
| Term | Online Bank A | Credit Union B | Online Bank C |
|---|---|---|---|
| 6 months | 4.75% | 4.50% | 4.85% |
| 1 year | 5.10% | 4.95% | 5.25% |
| 3 years | 5.15% | 5.00% | 5.20% |
The highest rate is not always at the same bank for every term. In this example, Online Bank C leads on six-month and one-year terms, but Online Bank A is highest for three years. Choose based on the term you actually want.
Understanding early withdrawal penalties
When you open a CD, the bank tells you the penalty for withdrawing before maturity. Common penalties are three months of interest, six months of interest, or a flat fee. On a $10,000 CD paying 5% APY, a three-month penalty costs about $125. On a five-year CD, it might cost $250.
The penalty is deducted from your principal, not added to your bill. If you withdraw $10,000 early and owe a $125 penalty, you receive $9,875. If you have earned $500 in interest by that point, the bank deducts the penalty from the interest first, so you get $10,375.
Some banks offer "no-penalty CDs" that let you withdraw without a fee, but they pay less — usually 0.5% to 1% lower than standard CDs. They make sense only if you genuinely might need the money and cannot accept the penalty risk.
Laddering CDs to balance rate and access
A CD ladder is a strategy where you split your money across multiple CDs with different maturity dates. For example, you might buy five one-year CDs, each maturing in years one through five. Every year, one CD matures and you can either withdraw the money or roll it into a new five-year CD at whatever rate is current.
This approach gives you access to some of your money every year while locking the rest away at longer-term rates. It also protects you if rates rise — when a CD matures, you can reinvest at the new higher rate instead of being stuck in an old low-rate CD.
A simple ladder for $25,000 might look like this: $5,000 in a one-year CD, $5,000 in a two-year CD, $5,000 in a three-year CD, $5,000 in a four-year CD, and $5,000 in a five-year CD. After one year, the first CD matures, and you roll it into a new five-year CD. The next year, the second CD matures, and so on.
FDIC insurance and protecting larger amounts
The FDIC insures CDs up to $250,000 per depositor per bank. If you have $500,000 to invest in CDs, you cannot put it all at one bank and keep it fully insured — only $250,000 would be covered. The other $250,000 would be at risk if the bank failed.
The solution is to split your money across multiple banks. Put $250,000 at Bank A and $250,000 at Bank B, and both are fully insured. You can also split within one bank by opening CDs in different ownership categories — for example, a CD in your name and a separate CD in your spouse's name — but this is more complicated and usually unnecessary if you have access to multiple banks.
Credit unions use the same $250,000 limit through the NCUA. If you belong to multiple credit unions, you can split money across them the same way.
When to buy a CD versus a high-yield savings account
A high-yield savings account pays nearly as much as a CD — often within 0.25% to 0.5% — but lets you withdraw money anytime without penalty. The tradeoff is that the rate can change. A CD locks in your rate for the entire term, so if rates fall, you keep earning the higher rate you locked in.
Choose a CD if you are certain you will not need the money for the term you select and you want the rate may provide. Choose a high-yield savings account if you might need the money sooner or you want flexibility to move it if rates rise elsewhere.
Some people use both: a high-yield savings account for an emergency fund (three to six months of expenses) and CDs for money they are saving toward a specific goal years away, like a down payment or retirement.
Frequently Asked Questions
Do I have to pay taxes on CD interest?
Yes. CD interest is taxable income in the year you earn it, even if you do not withdraw the money. Your bank will send you a 1099-INT form in January showing how much interest you earned. If you earn more than $10 in interest across all accounts, you must report it on your tax return.
Can I move a CD from one bank to another without a penalty?
No. Moving a CD before maturity triggers the early withdrawal penalty. You can, however, let it mature at the current bank and then open a new CD at a different bank at the new rate. Some banks offer a grace period (usually 7 to 10 days after maturity) where you can withdraw without penalty before the CD automatically renews.
What happens when my CD matures?
Your bank will notify you before maturity, usually 30 days in advance. You can then withdraw the money, let it renew into a new CD at the current rate, or move it elsewhere. If you do nothing, most banks automatically renew it into a new CD at whatever rate they are offering at that time — which may be lower than your original rate.
Are rates the same at all branches of the same bank?
Yes, rates are the same across all branches of the same bank. However, rates differ between the bank's online platform and its in-person branches. Online CDs almost always pay more because the bank has lower costs to offer them.
What is the difference between APY and APR on a CD?
APY (annual percentage yield) includes compounding — the interest you earn on your interest. APR (annual percentage rate) does not. Banks are required to show APY on CDs, so that is the number to compare. APY is always slightly higher than APR on the same CD.