What a certificate of deposit rate is

A certificate of deposit (CD) rate is the interest percentage a bank or credit union pays you for locking your money away for a fixed period. When you open a CD, you agree to leave a lump sum untouched until a specific date — called the maturity date — in exchange for a may provide return. The rate is set when you open the account and does not change, even if market interest rates move up or down.

CDs are different from regular savings accounts because the bank knows exactly how long it will hold your money. That certainty lets them offer you a higher interest rate than you would get in a savings account. The tradeoff is that you cannot withdraw the money early without paying a penalty — usually a loss of some or all of the interest you earned, or a portion of your principal.

CD rates vary by bank, by the length of time you commit to (called the term), and by how much money you deposit. A six-month CD will have a different rate than a five-year CD at the same bank. Rates also change over time as the Federal Reserve adjusts its benchmark interest rate, so a CD opened today will have a different rate than one opened six months ago.

Key Takeaways

  • CD rates are fixed when you open the account and may provide not to change for the entire term, whether rates rise or fall in the market.
  • Longer CD terms usually offer higher rates than shorter ones, but your money is locked away for that full period.
  • Early withdrawal penalties can wipe out most or all of your interest earnings, so only deposit money you will not need before maturity.
  • CD rates differ between banks and credit unions, so comparing offers before you open an account can mean hundreds of dollars in extra interest.
  • When a CD matures, the bank will either return your principal plus interest or automatically roll it into a new CD at the current rate.

How CD terms affect the rate you receive

Banks offer different rates for different term lengths. A three-month CD will pay less interest than a one-year CD at the same bank. A five-year CD will typically pay more than a one-year CD. This pattern exists because the bank can use your money for longer and plan more confidently around it.

The relationship between term length and rate is not always a straight line. Sometimes a two-year CD pays almost as much as a five-year CD, or a one-year CD pays more than an 18-month CD. These shifts happen when the Federal Reserve changes its benchmark rate or when banks compete for deposits. Checking multiple banks' current CD rates shows you what each term length is worth right now.

You also need to think about your own timeline. If you know you will need the money in two years, a five-year CD locks you in longer than you want. If you choose a six-month CD instead, you get a lower rate but you can access your money sooner. Some people open a "CD ladder" — multiple CDs with different maturity dates — so money becomes available at regular intervals without locking everything away for years.

Comparing CD rates across banks and credit unions

The same bank does not offer the same CD rate to everyone. Rates depend on the amount you deposit, the term you choose, and sometimes whether you are a new customer. A bank might offer 4.5% on a one-year CD for deposits of $10,000 or more, but only 4.2% for deposits under $10,000.

Credit unions often offer higher CD rates than banks, especially if you are a member. You may need to join the credit union first, which sometimes requires living or working in a certain area or belonging to a particular group. The membership fee, if there is one, is usually small — often $5 to $25 — and the higher CD rate can make it worthwhile.

Online banks typically offer higher CD rates than brick-and-mortar banks because they have lower overhead costs. You cannot walk into a branch, but you can open an account and manage it entirely online. Comparing rates across at least three to five institutions — including your current bank, a credit union you can join, and one or two online banks — gives you a real picture of what is available.

What happens when your CD reaches maturity

On the maturity date, your CD stops earning interest. The bank will then do one of two things: return your principal plus all interest earned to your account, or automatically roll the money into a new CD at the current rate. Most banks send you a notice before maturity telling you what will happen and giving you a window to withdraw the money or choose a different option.

If the bank automatically rolls your CD into a new one, you are locked in for another full term at whatever rate the bank is offering at that moment. If rates have dropped since you opened the first CD, your new rate will be lower. If rates have risen, you might have been better off opening a longer-term CD the first time, or you might be pleased to see rates go up. You can usually cancel the rollover and withdraw your money without penalty during a grace period — typically 7 to 10 days after maturity.

If you do not want the money to roll over, you need to tell the bank before the maturity date. Some banks let you do this online, others require a phone call or a visit to a branch. Missing the deadline and letting the CD roll over does not trap you permanently — you can still withdraw the money, but you will pay an early withdrawal penalty on the new CD.

Early withdrawal penalties and when they apply

If you withdraw money from a CD before the maturity date, the bank charges a penalty. The size of the penalty depends on the bank and the term length. A common penalty is three to six months of interest, but some banks charge more. On a high-rate CD, that can mean losing hundreds of dollars.

Some banks have no-penalty CDs that let you withdraw your money early without a penalty, but the interest rate is lower to compensate. A no-penalty CD might pay 4.0% while a regular CD pays 4.5%. Whether the no-penalty option is worth the lower rate depends on how confident you are that you will not need the money.

The penalty is calculated based on the interest rate and term of your specific CD. A $10,000 CD at 4.5% for one year earns about $450 in interest. If the penalty is three months of interest, you lose about $112.50. You would receive $10,337.50 instead of $10,450. Always ask the bank what the exact penalty is before you open a CD, because it varies widely.

How CD rates connect to the Federal Reserve and the economy

CD rates move when the Federal Reserve changes its benchmark interest rate. The Fed does not set CD rates directly, but banks base their rates on what the Fed charges them to borrow money. When the Fed raises its rate, banks can afford to pay you more on a CD. When the Fed lowers its rate, CD rates fall too.

This means CD rates are higher during some periods and lower during others. In 2022 and 2023, the Fed raised rates aggressively, and CD rates climbed to levels not seen in years — sometimes 4.5% to 5.5% or higher. In other periods, rates have been much lower. If you lock in a CD when rates are high, you benefit from that rate for the entire term. If you open a CD when rates are low and then rates rise, you are stuck with the lower rate unless you pay an early withdrawal penalty.

Economic news, inflation, and employment data all influence what the Fed does, which eventually affects CD rates. You do not need to predict the economy to use CDs wisely, but understanding that rates change over time helps you decide whether to lock in a rate now or wait.

Frequently Asked Questions

Is the interest from a CD taxable?

Yes. The interest you earn on a CD is taxable income in the year you earn it, even if you do not withdraw the money until the CD matures. The bank will send you a 1099-INT form at tax time showing how much interest the CD earned. You report this on your tax return.

Can I move a CD from one bank to another without a penalty?

No. Withdrawing a CD early to move it to another bank triggers the early withdrawal penalty, even if the new bank offers a higher rate. You can avoid the penalty by waiting until maturity and then opening a new CD at the other bank. Some people decide the penalty is worth paying if the rate difference is large enough, but calculate the penalty first.

What is the minimum amount I need to open a CD?

Minimum deposits vary by bank and by CD term. Some banks have no minimum, others require $500, $1,000, or $10,000. Credit unions often have lower minimums than banks. Check the specific bank's website or call to find out what minimum applies to the CD term you want.

Are CDs safe if the bank fails?

CDs at FDIC-insured banks are protected up to $250,000 per depositor per bank. If the bank fails, the FDIC guarantees you will get your principal and accrued interest back, up to that limit. Credit union CDs are protected similarly through the NCUA up to $250,000. This protection applies even if the bank goes out of business.

Should I open a CD or keep money in a savings account?

A CD pays more interest than a savings account, but your money is locked away. A savings account gives you flexibility to withdraw whenever you need it, but the rate is lower. If you have money you will not need for several months or longer, a CD usually pays more. If you might need the money soon, a savings account is safer because there is no penalty for withdrawal.