5 Things To Know Before Opening A CD

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Opening a CD account is like making a deal with your bank: You promise to leave your money alone for a set period, and they promise to pay you a fixed interest rate that’s typically higher than regular savings accounts. The top CDs right now offer up to 4.50% APY, according to Bankrate’s latest data.

But CDs aren’t right for everyone or every financial situation. Before you lock up your money, you need to understand exactly what you’re getting into. The wrong choice could cost you money in penalties or missed opportunities.

Here’s what you absolutely need to know before opening a CD account.

1. Understand CD basics and terminology

If you’re new to investing in CDs, it can help to familiarize yourself with the terminology associated with these accounts. Here’s a breakdown of the essential terms and concepts:

Annual percentage yield (APY) determines your earnings

The annual percentage yield (APY) tells you exactly how much your money will grow over one year, including the effect of compounding. A $10,000 CD at 4.50 percent APY earns $450 in one year — significantly more than what you’d earn in a typical savings account paying 0.58 APY.

Interest compounds daily, monthly, or quarterly depending on the bank. More frequent compounding means slightly higher earnings. When you’re comparing CD rates, focus on APY rather than the base interest rate for accurate comparisons. You can use Bankrate’s CD calculator to estimate how much you could earn from a CD.

Term length locks in your rate and money

CD terms typically range from 3 months to 5 years. Your chosen term determines both how long your rate is guaranteed and how long your money remains inaccessible without penalties.

Early withdrawal penalties can cost you

Most CDs charge penalties equal to 3 to 12 months of interest if you withdraw money before maturity. On a $10,000 CD earning 4.50 percent APY, early withdrawal could cost you $125-$450 in penalties alone, plus you’d lose future interest earnings.

Some banks offer no-penalty CDs that allow early withdrawals without fees, but these typically offer lower rates in exchange for flexibility.

Federal deposit insurance

CDs from FDIC-insured banks or NCUSIF-insured credit unions are protected up to $250,000 per depositor, per institution, per ownership category. This makes CDs as safe as savings accounts while offering higher guaranteed returns.

2. Know the different types of CDs available

Not all CDs work the same way. Understanding your options helps you choose the right product for your situation.

Traditional fixed-rate CDs

Most CDs lock in a fixed rate for the entire term. This protects you if rates fall but means you miss out if rates rise significantly. Traditional CDs work best when you believe current rates are attractive and unlikely to increase substantially during your term.

Specialty CDs

• No-penalty CDs let you withdraw money without fees but typically offer rates 0.25 to 0.50 percentage points lower than traditional CDs. Choose these if you want CD-level rates but aren’t certain you can leave the money untouched.
• Bump-up CDs allow you to request one rate increase during your term if rates rise. Step-up CDs automatically increase your rate at predetermined intervals.
• Jumbo CDs require minimum deposits of $100,000 or more and may offer slightly higher rates, though the premium over standard CDs has shrunk in recent years.

3. Learn the strategy of CD laddering

CD laddering helps you balance higher long-term rates with regular access to your money. Instead of putting all your money into one CD, you split it across multiple CDs with staggered maturity dates. A basic five-rung ladder might involve:

• $2,000 in a 1-year CD
• $2,000 in a 2-year CD
• $2,000 in a 3-year CD
• $2,000 in a 4-year CD
• $2,000 in a 5-year CD

When each CD matures, you can reinvest in a new 5-year CD (typically offering the highest rates), spend the money or adjust your strategy based on current rate environment. The advantages of laddering include more regular access to your money with penalties, more protection against rate changes and potentially higher returns than keeping everything in short-term CDs.

Related reading: How to build a CD ladder step-by-step

4. Understand how inflation affects your CD returns

Even guaranteed returns can lose purchasing power if they don’t keep pace with inflation. The good news: Current CD rates are outpacing inflation, but this hasn’t always been the case.

With inflation running around 2.7% annually, a CD earning 4.5 percent APY provides a real return of approximately 1.8 percent after accounting for inflation. This beats the negative real returns many savers experienced in 2021-2022 when inflation spiked above most savings account rates.

“Superior yields above the recent inflation rate can still be found and leveraged. The Fed is seen keeping its benchmark short-term rate at its current level for months to come. This ‘higher for longer’ interest rate environment can be productive for savers who lock in today’s competitive rates.”

— Mark Hamrick, Bankrate senior economic analyst

Monitor both current inflation rates and Fed policy signals when choosing CD terms. If you expect rates to rise further, consider shorter terms or no-penalty CDs for flexibility.

5. Choose CDs over a savings accounts in specific situations

CDs aren’t automatically better than high-yield savings accounts. The right choice depends on your financial situation and goals. Here’s when CDs make sense:

1. You have an emergency fund established: Never put emergency money in CDs. Keep 3-6 months of expenses in an easily accessible money market account or savings account first. Here are Bankrate’s top picks for where to keep your emergency fund.
2. You’re saving for a specific future expense: CDs excel for goal-based saving with known timelines. Saving for a wedding in two years? A 24-month CD locks in your rate and removes the temptation to spend the money elsewhere.
3. CD rates exceed savings account rates: Compare current rates before deciding. Sometimes high-yield savings accounts offer competitive rates with more flexibility.
4. You can meet minimum deposit requirements: Many top CD rates require $1,000 to $10,000 minimum deposits, though some banks like Ally Bank and Synchrony Bank have no minimums.

When to choose savings accounts instead

Stick with savings accounts if you need regular access to your money, don’t have an emergency fund or can find savings accounts with comparable rates and no restrictions. Check out Bankrate’s top savings account picks for more options.

How to open a CD account

Ready to open a CD? Follow these steps to ensure you get the best deal:

1. Compare rates across multiple institutions: Don’t accept your current bank’s CD rates without shopping around. Online banks consistently offer higher rates than traditional brick-and-mortar institutions.
2. Verify FDIC or NCUSIF insurance: Only open CDs at federally insured institutions to protect your deposit.
3. Choose your term based on your goals: Match the CD term to when you’ll need the money, not just which term offers the highest rate.
4. Gather required documentation: You’ll need your Social Security number, government-issued ID, and funding source information.
5. Read the fine print: Understand the penalty structure, renewal terms, and any rate changes during promotional periods.

Bottom line

Opening a CD can be a smart savings strategy if you understand the trade-offs between guaranteed returns and liquidity. Focus on matching CD terms to your specific financial goals, comparing rates across institutions, and ensuring you have adequate emergency savings before locking money away.

The current interest rate environment offers attractive CD yields that outpace inflation — but these rates won’t last forever. If CDs fit your savings strategy, consider opening one while rates remain elevated.