What a deposit CD is and how the rate works

A certificate of deposit (CD) is a savings product where you give a bank a lump sum of money and agree to leave it there for a set period — usually three months to five years. In return, the bank pays you a fixed interest rate. That rate is what you earn on your money, and it does not change for the life of the CD, even if the bank's rates drop later.

The interest rate on a CD depends on three things: how long you lock your money away, what the current market is doing, and which bank you choose. A three-month CD will pay less than a five-year CD at the same bank. A bank offering 4.5% on a one-year CD might offer 5.2% on a five-year CD. Right now, rates vary widely — some banks pay 4% on a one-year CD, others pay 5.5% or higher. You have to check each bank's current rates because they change frequently and differ from one institution to the next.

Key Takeaways

  • CD rates are fixed for the entire term you choose, so a rate locked in today will not change even if the bank lowers rates next month.
  • Longer terms usually pay higher rates than shorter ones, but your money is locked away longer and you pay a penalty if you withdraw early.
  • Banks and credit unions set their own rates, so a one-year CD at one bank might pay 4.2% while another pays 5.1% for the same term.
  • When your CD matures (the term ends), the bank returns your principal plus interest, and you can then open a new CD or move the money elsewhere.
  • Online banks typically offer higher rates than brick-and-mortar banks because they have lower overhead costs.

How CD rates compare across different term lengths

Banks offer CDs in many different lengths. The most common are three months, six months, one year, two years, three years, and five years. Some banks also offer terms of 18 months or seven years. The longer the term, the higher the rate usually is — this is called the yield curve, and it reflects the fact that you are giving up access to your money for longer.

A typical pattern might look like this: a three-month CD pays 3.8%, a one-year CD pays 4.5%, and a five-year CD pays 5.1%. But this pattern is not may provide. When interest rates are falling, banks sometimes offer higher rates on shorter terms to attract deposits quickly. When rates are rising, the curve might be flatter. The only way to know what a specific bank is offering is to check their website or call them directly.

Your choice of term should depend on when you might need the money. If you think you will need it in two years, a two-year CD locks in a rate and keeps you from being tempted to spend it early. If you are not sure, a shorter term lets you reinvest at a higher rate when it matures — but you also risk rates dropping by then.

Where to find current CD rates

CD rates are published on bank websites, usually in a rates or products section. Major national banks like Chase, Bank of America, and Wells Fargo post their rates online. Credit unions also offer CDs, often at competitive rates, and you can find those through your own credit union or through a credit union locator tool.

Online banks — such as Marcus, Ally, and American Express Personal Savings — typically offer the highest rates because they do not maintain physical branches. You can compare rates across multiple banks using financial websites that track CD rates, though you will still need to visit each bank's site to confirm the rate and open an account.

Rates change frequently, sometimes daily. A rate you see today might be different next week. If you find a rate you like, you can usually open the CD online or by phone within minutes, and the rate is locked in at that moment.

What happens when your CD matures

When your CD term ends, the bank sends you a notice — usually 10 to 30 days before the maturity date — telling you what will happen next. You have a choice window, usually 7 to 10 days, to decide what to do with your money. Your options are: open a new CD at the bank (at whatever rate they are offering at that time), move the money to a savings account, transfer it to another bank, or withdraw it in cash.

If you do nothing during the grace period, most banks will automatically roll your CD into a new one at the same term length, at whatever rate they are currently offering. This is called auto-renewal. The new rate might be higher or lower than what you were earning. If you do not want to renew, you must contact the bank before the maturity date and tell them what you want to do instead.

Early withdrawal penalties and when they apply

If you withdraw money from a CD before the term ends, the bank charges a penalty. The penalty is usually a certain number of months' worth of interest. For example, a one-year CD might have a penalty of three months' interest. If you were earning $100 per year and you withdraw after six months, you lose $25 in interest (three months' worth).

Some banks have different penalties for different term lengths. A five-year CD might have a penalty of six months' interest, while a one-year CD has a penalty of one month's interest. A few banks — mostly online banks — offer CDs with no penalty or a very small penalty, but these usually pay a lower rate to make up for it.

Before you open a CD, read the bank's disclosure document to see what the penalty is. If you think there is any chance you will need the money before the term ends, factor that penalty into your decision. Sometimes it is better to choose a shorter term and accept a lower rate than to lock money away at a higher rate and risk paying a penalty.

How CD rates fit into a savings strategy

A CD is useful when you have money you do not need right now but will need at a known time in the future — for example, a down payment you are saving for in two years, or a car replacement fund. The fixed rate and fixed term let you plan exactly how much you will have.

CDs are also useful when interest rates are high and you want to lock in a good rate before they drop. If rates are 5.2% today and you think they will fall, opening a five-year CD now protects you from that drop. On the other hand, if rates are historically low and you think they will rise, a shorter term might make sense so you can reinvest at a higher rate sooner.

Many people use a CD ladder strategy: they open multiple CDs with different maturity dates (for example, one-year, two-year, and three-year CDs all at the same time). As each one matures, they can reinvest at whatever the current rate is. This spreads out your access to money and lets you take advantage of rate changes without locking everything away for a long time.

Frequently Asked Questions

Do I have to pay taxes on CD interest?

Yes. CD interest is taxable income. The bank will send you a 1099-INT form at the end of the year showing how much interest you earned, and you report that on your tax return. Some people open CDs in retirement accounts (like an IRA) to defer taxes, but that is a separate decision from choosing the CD itself.

Can I move money from a CD to another bank before it matures?

You can, but you will pay the early withdrawal penalty. The penalty is set by the bank that issued the CD, not by the bank you are moving to. If the new bank's rate is significantly higher, it might be worth paying the penalty, but do the math first — compare the penalty cost against how much extra you would earn at the new rate.

What is the difference between a CD and a high-yield savings account?

A high-yield savings account lets you withdraw money anytime without penalty, but the rate is variable and can drop at any time. A CD locks in a fixed rate for a set term, but you pay a penalty if you withdraw early. CDs usually pay more, but only if you can leave the money alone for the full term.

Are CDs insured if the bank fails?

Yes, up to $250,000 per depositor per bank, through the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions. If you have more than $250,000, you can spread it across multiple banks to stay fully insured.

Should I open a CD now or wait for rates to go higher?

No one can predict where rates will go. If current rates meet your needs and you have money you will not need for the CD term, locking in a rate now removes the guesswork. If you think rates will rise soon, a shorter-term CD lets you reinvest sooner. The cost of waiting is the interest you do not earn in the meantime.