A certificate of deposit (CD) is a type of savings account. With a CD, you deposit your money for a specified period, called a term (usually ranging from a few months to 5 years). In return for locking up your money for the term, CDs typically offer higher interest rates than standard savings account. Many types of CDs come with early withdrawal penalties that you must pay if you take money out early.
There are several types of CDs, including fixed rate, no penalty and step up. Let’s explore the key features of different types of CDs.
Fixed rate CDs
Fixed rate CDs – sometimes called traditional CDs – are the standard CD. They have a fixed term, usually between a few months to a few years, and a fixed interest rate that stays the same throughout the term. While it’s possible to withdraw money from a fixed rate CD, there is likely a penalty – usually a few months’ interest – for doing so.
No penalty CD
As the name implies, a no penalty CD allows you to withdraw your money before the term ends without incurring a penalty. While these CDs can have lower rates than fixed rate CDs, they can still offer a higher return than a standard savings account. This flexibility can make no penalty CDs a good choice for CD owners who may need to access all or some of their funds early.
Step up CDs
Unlike fixed rate CDs, a step up CD’s interest rate can change. Step up CDs start with a set interest rate at the beginning of the term, but increase at scheduled intervals determined by the bank, such as every 6 months or annually. Step up CDs may still have penalties for early withdrawals.