How CDs Work

A certificate of deposit (CD) is a savings deposit account that earns a guaranteed interest rate in exchange for keeping your money in the CD for a specific term. Generally, longer CD terms deliver higher interest rates.

When you open a CD account, you agree to lock your money in the CD for a set period of time to receive typically higher annual percentage yields (APYs) than other savings vehicles. For example, the Federal Deposit Insurance Corp. (FDIC) reports the national average yield on a 12-month CD is 5.46%, while the average traditional savings account earns a paltry 0.46% as of October 2023.

CD terms commonly range from three months to five years and usually require you to make a minimum deposit ranging from $500 to $2,500 or more, although some banks don’t require a specific deposit amount to start a CD.

CDs are widely considered a safe place to park your money as you usually can’t lose your initial deposit even if interest rates tank. Additionally, CDs are typically insured by the FDIC or National Credit Union Administration (NCUA) up to the standard deposit coverage limit of $250,000 per depositor, per insured bank and per ownership category. Bear in mind, some CDs offered by a brokerage firm or another non-bank entity may not come with federal insurance, so verify the CD is federally insured before opening an account.

When Is the Best Time to Buy a CD?

As a general rule, the best time to buy a CD is when interest rates are higher, ideally when they are at or near their peak. As of November 2023, the benchmark interest rate is about 5.4%, its highest level in 22 years. If you suspect interest rates will decline in the near future, opening a CD now could lock in a higher fixed interest rate over your CD’s term. And if rates drop, you’ll still maintain the rate you sign up for until your CD matures.

Another good time to buy a CD is when you have a specific savings goal in mind, such as a home down payment or a wedding. You can align the timeline for reaching your goal with the right CD term, even if interest rates aren’t as high as you’d like. Once the CD matures, you can withdraw the money you set aside for your goal, plus the interest the CD earned. Although you usually can’t keep contributing to a CD once you open it, you can open additional CDs that will mature around the same time to maximize your yield and progress toward your savings goals.

How to Make the Most out of CD Rates

Opening a traditional CD account is fairly straightforward, but you can make the most out of CD rates by implementing the right CD strategy or taking advantage of different types of CDs, such as:

CD Ladder

A CD ladder is a savings strategy in which you open multiple CDs with terms that end at different times. For example, your CD ladder might include several CDs with maturity dates at one year, two years, three years and five years. With this strategy, you’ll gain access to your CD balances periodically on a regular schedule without having to pay early withdrawal fees. If interest rates are still high, you can reinvest in a new CD. Conversely, if interest rates are falling, you can rest assured that your longer-term CDs are still earning a higher rate.

CD Barbell

While a CD ladder can include CDs of all term lengths, a CD barbell only uses short- and long-term CDs, which may make sense if you’re trying to reach both short-term and long-term savings goals.

Bump-up CDs

A bump-up CD allows you to “bump up,” or increase your interest rate before it matures. Most bump-up CDs only allow one rate increase per term, which can be advantageous when interest rates rise. With a bump-up CD, you don’t have to wait until your CD matures to earn a higher yield. Remember, however, banks often offer a lower initial APY on bump-up CDs, which could limit your interest earnings.

Step-up CDs

A step-up CD is similar to a bump-up CD except that your bank increases your yield automatically at regular intervals, such as annually or biannually. But again, this type of CD may feature a lower starting interest rate than you might receive with a traditional fixed-rate CD.

No-penalty CDs

One of the most significant drawbacks of a traditional CD is its lack of liquidity; you must keep your money locked up in the fund or pay an early withdrawal penalty. But with a no-penalty CD, also known as a liquid CD, you can withdraw money from your CD penalty-free at any time. As you might suspect, no-penalty CDs tend to offer lower APYs than less flexible types of CDs.

Jumbo CD

Jumbo CDs are particularly valuable to savers looking for a safe place to store large deposits. These CDs usually offer a higher interest rate than traditional CDs but require a substantial minimum deposit, often $100,000 or more. Keep in mind that deposit insurance is limited to $250,000 per account category per bank, so any deposits you make above that threshold may not be fully insured.

The Bottom Line

Saving money is essential to maintaining your financial health, but don’t forget how debt can eat away at your earnings. For example, earning a 5% APY on $2,000 in a CD account is advantageous, but it often makes more sense to prioritize paying down high-interest debt. Additionally, high debt balances can have a negative effect on your credit score. While investing in a CD can help you save money safely and earn a high yield, also be sure to consider your other options for using the cash.

Along those lines, consider tackling your debt with a repayment strategy, such as the debt snowball or debt avalanche method. Track your progress with free credit monitoring to see any changes to your credit report with updated monthly reports.