A CD is a type of savings account that lets you deposit your money for a specified period, known as a term. In exchange, you can typically earn a higher APY than you would with a regular savings account, and the interest rate is typically fixed. You can withdraw the funds, plus the earned interest, once the CD matures and the term ends.
Let’s examine how to open an account, including tips to choose the right CD for you and how many you can have.
1. Choose your CD type and term
There are several different types of CDs, including:
- Standard (fixed rate) CD: This common type of CD allows you to lock in your money for a set term at a fixed interest rate. You’ll most likely pay a few months’ interest as a penalty for withdrawing your funds early.
- Step up CD: A step up CD locks in your money for a set term but includes guaranteed interest rate increases for the term of the CD once it has been opened. These increases happen automatically on a pre-agreed schedule, such as every 12 months. Step up CDs may start at a lower interest rate than a standard CD, have fewer term lengths available and still come with an early withdrawal penalty.
- No penalty CD: This flexible type of CD doesn’t charge a fee if you withdraw your money before the term ends. A no penalty CD may be the right option if you want more flexibility, though the APYs are often lower than those for standard CDs.
- Add-on CD: Unlike other CDs, these allow you to add on additional funds to your CD after you’ve opened the account. Rates, however, may be lower compared to those of traditional CDs.
CD terms can range from 1 month to several years. When thinking about how long you want to keep your money in a CD, consider how your overall finances will be affected if you can’t access that money for the term. Think about how much you’ll earn in interest over different terms, and whether you can secure a higher interest rate if you commit to keeping your money in a CD for a longer term.
2. Choose a financial institution
Once you decide on a CD type and term, the next step is finding a bank that meets your needs.
You can find CDs at most banks and credit unions. The type of CD you want, and your desired term, can help you narrow down your search. Beyond that, you may consider the APY as well as certificate of deposit account requirements, such as:
- Minimum deposit: CDs may require a minimum deposit amount, which can vary by financial institution.
- Withdrawal penalties: Most CDs come with penalties for withdrawing your funds early. Read the fine print and make sure you are very clear on the details before opening an account.
3. Apply for a CD account
CD applications are usually straightforward and can be completed online or in person, depending on the financial institution. Gathering your documents ahead of time may help you complete your application faster.
In general, you need to provide:
- Name
- Contact information (such as address, phone number and email)
- Social security number
- Date of birth
- Photo ID (such as a passport, driver’s license or other government-issued ID)
- Proof of address (such as a utility bill)
You’ll get a disclosure for the CD account during the application process, which will explain how the CD works in full detail. Be sure to carefully review the disclosure before funding your account.
