Are CDs Worth It?

When it comes to saving money in a bank account, you have many choices. While traditional savings accounts can be a solid option those interest rates can change over time. You may be able to find a specialty savings account more suited to your needs, and certificates of deposit (CDs) are an option worth exploring.

A CD account is a type of bank account that lets you deposit money for a specific period and receive a fixed interest rate during this period called a CD term. There are many types of CDs, such as step-up CDs and no-penalty CDs. Each comes with its own requirements and offers different perks. The best type of CD depends on your needs.

Let’s examine the pros and cons of CDs, factors to consider when looking for an account and how to decide if a CD may be worth it for you.

Pros of CDs

CDs can be a predictable way to earn interest on your savings. The annual percentage yield (APY) is determined when you open your account. That means you’ll know exactly how much money you stand to make by keeping your money in that CD for the given term. The main appeal is that CDs can offer higher APYs than you might find with traditional savings accounts, depending on the term.

Citi offers fixed rate, no-penalty and step-up CDs. No-penalty CDs let you withdraw your funds, penalty-free, 7 days after funding the account. Citi step-up CDs automatically increase your interest rate at set intervals during the CD terms, such as after 10-month periods.

CDs also come in a wide variety of terms, from a few months up to several years. Citi CD terms, for example, range from 3 months up to 5 years. You can choose the term that makes sense for you, based on your savings goals and financial flexibility.

Money deposited into a CD at an FDIC-insured bank may qualify for FDIC deposit insurance coverage. FDIC insurance is capped at $250,000 per depositor for each account ownership category at a covered bank.

Cons of CDs

Once you deposit money into a CD, you generally have to keep it in the account until the term ends, known as the maturity date. Otherwise, you may pay a fee for withdrawing your funds early, which could amount to a number of months' worth of interest. That means it’s technically possible to lose money in a CD, depending on the penalty amount and when you withdraw your money.

The fixed returns typically offered by CDs also have a potential downside: If rates go up after you open the account, your locked-in APY may look lackluster by comparison.

CD returns may also be lower than higher-risk options, such as investing in stocks or bonds. Depending on the APY, the return may not be high enough to keep up with the rate of inflation. In that case, your money may lose its purchasing power by the time the term ends.

Key factors to determine if a CD is worth it

Several factors can help determine if it’s worth it to put your money into a CD.

Current CD interest rates

The APY will likely be the most important factor in determining how much of a return you may earn. The available APYs may change based on the federal funds rate. When the Federal Reserve raises that rate, that may translate to higher CD APYs, and vice versa. Some banks may offer better CD rates than others, so rate shopping is key.

How general interest rates are trending

If interest rates are on the rise, it may make sense to wait to open a CD so that you can capture those higher APYs. However, if rates are expected to decline, getting a CD sooner may help you avoid locking in a lower rate.

When you might need access to your savings

CDs generally require a commitment of months or even years. Your timeline for spending that money may help you decide if a CD makes sense for you. If you’re buying a house soon, for example, tying that money up in a CD may not be appropriate. However, if you’re looking to fund a longer-term goal, like saving for a vacation or a wedding, CDs could be a valuable tool.

When a CD may make sense for you

There are several situations when a CD might make sense. For example, if you’re looking for a generally low-risk account that offers a predictable interest rate, a CD may be the answer. It may also help those who want to make progress toward medium- or long-term savings goals, especially if interest rates are expected to drop soon. Those who prefer to keep their savings out of easy reach, to avoid the temptation to spend, may also benefit from a CD.

You may be even better positioned to open a CD if you have other savings, such as an emergency fund, to fall back on. That way, you'd be less likely to make an early withdrawal and potentially pay a fee if an emergency pops up.

Learning about the different types of CDs and researching the requirements, like minimum deposits, can help you determine if a CD is right for your savings goals and find the one that best suits your needs.

Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.