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A certificate of deposit, or CD, is a bank deposit that generally pays interest in exchange for leaving money on deposit for a specified term. Common terms range from a few months to several years, although products vary widely.
How a traditional CD works
You deposit money for a stated term. The bank pays interest according to the account agreement. At maturity, you can generally withdraw the funds, renew, or move them, subject to the bank’s procedures.
APY and compounding
APY helps compare deposit earnings because it incorporates compounding assumptions. Compare APYs on the same date and check whether the rate is fixed, variable, promotional, or tiered.
Early-withdrawal penalties
Many CDs charge a penalty if money is withdrawn before maturity. The penalty can reduce interest and, depending on terms, may affect principal. A higher APY is less useful if there is a meaningful chance you will need the money early.
Automatic renewal
Some CDs automatically renew after maturity unless you act during a grace period. Read the agreement so you know when the CD matures, what rate may apply on renewal, and how long you have to withdraw without penalty.
FDIC insurance
The FDIC covers certificates of deposit at FDIC-insured banks along with other qualifying deposit products. Standard coverage is at least $250,000 per depositor, per insured bank, for each ownership category, subject to the coverage rules.
If you already have deposits at the same bank, the CD may be combined with them for insurance calculations depending on ownership category.
Brokered CDs
A brokered CD is purchased through a third party rather than directly from the issuing bank. The FDIC warns that deposit brokers are not licensed or registered by the FDIC and that investors should confirm the actual issuing bank and insurance treatment.
Brokered CDs can also have different liquidity characteristics. Selling before maturity can expose you to market-price risk instead of a simple bank early-withdrawal penalty.
Callable and market-linked CDs
Some CDs have complex features. A callable CD may allow the issuer to end the deposit early under specified terms. A market-linked CD may calculate interest using a market index or formula. Complexity increases the importance of reading the actual agreement.
When a CD can make sense
A CD can fit money you do not expect to need before a known date and when the rate compensates you for reduced liquidity. It is less suitable for money that may be needed unexpectedly.
A CD comparison checklist
- APY and whether the rate is fixed.
- Maturity date.
- Early-withdrawal penalty.
- Automatic-renewal terms.
- Minimum deposit.
- FDIC-insurance status and ownership category.
- Whether the CD is direct or brokered.
- Any callable, variable, or market-linked feature.
Continue learning
Visit the Banking & Interest Rates hub and read APY vs. APR.
Sources & methodology
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Sources, dates, and methodology matter.
EconomicHQ prioritizes primary sources for consequential financial and economic claims and identifies reporting periods for changing information. This article is educational and does not provide individualized financial, investment, tax, legal, or credit advice.