A certificate of deposit is a savings account where you lock up money for a set time in exchange for a may provide interest rate

A certificate of deposit (CD) is an agreement between you and a bank or credit union. You give them a lump sum of money — anywhere from $500 to $100,000 or more, depending on the institution — and they promise to pay you back that amount plus interest after a fixed period. That period is called the term, and it typically ranges from three months to five years, though some banks offer longer terms.

The interest rate is locked in when you open the CD. Unlike a regular savings account where the rate can change, your CD rate stays the same for the entire term. This predictability is the main reason people use CDs: you know exactly how much money you will have when the term ends.

CDs are different from direct deposit, which is how your paycheck gets into your account. But many people keep their CD at the same bank where their paycheck lands, which makes it convenient to move money between accounts.

Key Takeaways

  • You deposit a fixed amount of money for a set period (three months to five years), and the bank pays you a may provide interest rate that does not change.
  • You cannot withdraw the money before the term ends without paying a penalty, usually a few months' worth of interest.
  • CD rates are typically higher than regular savings accounts because you are agreeing to lock your money away.
  • The Federal Deposit Insurance Corporation (FDIC) insures CDs up to $250,000 per depositor per bank, so your money is protected if the bank fails.
  • When your term ends, you can withdraw the money, renew the CD at the current rate, or move it elsewhere.

How much interest you earn depends on the rate and the term length

The interest you earn on a CD is calculated based on two things: the annual percentage yield (APY) and how long your money sits in the account. A higher APY means more money in your pocket. A longer term usually means a higher APY, though this is not always true — rates depend on what the bank is offering at the time you open the CD.

For example, a three-month CD might pay 4.5% APY, while a five-year CD at the same bank might pay 5.0% APY. If you put $10,000 in the five-year CD at 5.0%, you would earn roughly $2,763 in interest over the full term (the exact amount depends on how the bank compounds interest — daily, monthly, or annually). With the three-month CD at 4.5%, you would earn about $112 in interest every three months.

The tradeoff is clear: longer terms lock in higher rates, but you cannot touch your money. Shorter terms let you access your cash sooner, but the rate is lower.

What happens if you need the money before the term ends

CDs come with an early withdrawal penalty if you take your money out before the maturity date — the day the term ends. The penalty is usually a set number of months of interest. A CD with a three-month penalty means you lose three months' worth of the interest you would have earned. Some banks charge a flat dollar amount instead.

The penalty can be steep enough to wipe out all your interest and eat into your original deposit. Before you open a CD, read the disclosure document to see exactly what the penalty is. This is why CDs work best for money you know you will not need for the full term.

A few banks now offer no-penalty CDs, which let you withdraw your money early without a penalty — but the interest rate is lower to make up for that flexibility. These are worth comparing if you are not certain you can lock your money away.

CD rates vary by bank and change frequently

Banks set their own CD rates based on what the Federal Reserve is doing and what other banks are offering. When the Fed raises interest rates, banks typically raise CD rates too. When the Fed cuts rates, CD rates fall. This means the rate you see today might be different from the rate next week.

Large national banks often offer lower CD rates than smaller banks or online banks. Online banks tend to have higher rates because they have lower overhead costs. Credit unions sometimes offer competitive rates to their members. Before you open a CD, compare rates across several institutions — the difference between a 4.5% rate and a 5.5% rate adds up quickly on a large deposit.

You can find current CD rates on bank websites, on financial comparison sites, or by calling the bank directly. Some people use a CD ladder strategy: they open multiple CDs with different term lengths so that one matures every few months, giving them regular access to some of their money while keeping the rest locked in at higher rates.

FDIC insurance protects your CD if the bank fails

The FDIC is a federal agency that insures deposits at member banks. If your bank fails, the FDIC guarantees you will get your money back up to $250,000 per depositor per bank. This means your CD is protected — you will not lose your principal or the interest you have earned.

The $250,000 limit applies to all your deposits at one bank combined. If you have a CD and a savings account at the same bank, they count toward the same $250,000 limit. If you want to insure more than $250,000, you can open CDs at different banks.

Credit unions have similar protection through the National Credit Union Administration (NCUA), which covers up to $250,000 per member per credit union. This protection is automatic — you do not have to do anything to activate it.

What to do when your CD reaches maturity

When your term ends, the bank will notify you and give you a window of time — usually seven to ten days — to decide what to do with your money. You have three main options: withdraw the money, renew the CD at the current rate, or move it to a different account.

If you do nothing, many banks will automatically renew your CD at whatever the current rate is. This can work in your favor if rates have gone up, but it can hurt you if rates have fallen. Read the maturity notice carefully so you know what the new rate will be and when the renewal happens.

If you want to shop around for a better rate, you can withdraw your money and open a CD elsewhere. There is no penalty for withdrawing after the term ends. Some people use this moment to reassess their financial goals — maybe they need the money now, or maybe they want to try a different term length or a different bank.

Frequently Asked Questions

Can I add more money to my CD after I open it?

Most CDs do not allow you to add money once the account is open. You deposit the full amount upfront, and that amount stays the same until maturity. If you want to invest more, you would need to open a separate CD.

Are CDs a good investment if inflation is high?

CDs protect your money from loss, but if inflation is higher than your CD rate, your money loses purchasing power. For example, if your CD earns 4% but inflation is 5%, you are effectively losing 1% in real value. CDs are best for money you want to keep safe, not for building wealth.

What is the difference between a CD and a money market account?

A money market account lets you withdraw money anytime without penalty, but the interest rate can change. A CD locks in a rate for a set term but charges a penalty for early withdrawal. Money market accounts offer more flexibility; CDs offer more predictability.

Do I have to pay taxes on CD interest?

Yes. The interest you earn on a CD is taxable income. The bank will send you a 1099-INT form at tax time showing how much interest you earned. You report this on your tax return.

Can I use a CD as collateral for a loan?

Yes. Some banks will lend you money using your CD as collateral, so you do not have to break the CD and pay the penalty. The interest rate on the loan is usually higher than the CD rate, but it can be cheaper than paying the early withdrawal penalty.