Key insights:
- A certificate of deposit (CD) may allow you to earn a higher interest rate than a standard savings account on money that you don’t need access to immediately
- Different types of CDs may offer unique benefits, such as a rate increase during the term or no-penalty withdrawals
- The right CD for you depends on your current financial situation and goals
A certificate of deposit (CD) is a type of savings account that requires you to deposit your money for a specified period, called a term. In return for keeping your money in the account for the entire term, CDs typically offer higher interest rates than standard savings accounts. You generally pay a fee for withdrawing your money before the CD term ends. CD terms can range from a few months to several years.
There are many different types of CDs, including fixed rate, no penalty and step up CDs. It’s important to understand how each type works to choose a CD that makes sense for you.
Fixed rate CDs
Fixed rate CDs — sometimes called traditional CDs — are the standard CD. They have a fixed term, usually between a few months and 5 years, and a fixed interest rate that stays the same throughout the term. That means you’ll know how much interest you’ll earn over the course of the term.
For instance, if you deposited $1,000 in a 1-year CD with a 4.00% annual percentage yield (APY), you’d have $1,040 at the end of the term.
While it’s possible to withdraw money from a fixed rate CD early, there is likely a penalty for doing so. Penalties are typically at least a few months’ worth of interest.
Best for:
Longer-term financial goals, like a down payment on a house or a car.
No penalty CDs
As the name implies, a no penalty CD allows you to withdraw your money before the term ends without incurring a penalty. These CDs could have lower rates than fixed rate CDs. That said, their flexibility can make no penalty CDs a good choice for savers who may need to access all or some of their funds early.
Best for: Maintaining financial flexibility if you don’t have an emergency fund or think you might need the money before the term is up.
Step up CDs
Unlike fixed rate CDs, a step up CD’s interest rate increases at scheduled intervals, as determined by the bank. For example, interest rates might increase every 6 months or annually. Starting rates for step up CDs may be lower than what you’ll see with fixed rate CDs. You’ll need to do the math to see if a step up CD offers more overall interest compared to other CDs.
Best for:
Growing your money over the long term, especially when benchmark interest rates set by the federal government are expected to rise.
Bump-up CDs
Similar to step up CDs, bump-up CDs also allow for interest rate increases. However, instead of scheduled raises, bump-up CDs let you request a rate increase to capitalize on broader market rate increases. Typically, you can only request a rate increase once with a bump-up CD. Longer-term CDs may allow for multiple rate increase requests.
Best for:
When interest rates are very likely to rise during the CD term.
Add-on CDs
Add-on CDs let you make additional deposits throughout the term. For example, you may be able to add funds every 12 months. Most other CDs only allow you to deposit money when you open the account. Add-on CDs can be a flexible option, but the rates are typically lower than you might find with traditional CDs.
Best for:
Having the flexibility to deposit more to your CD.
Jumbo CDs
A jumbo CD is similar to a standard fixed rate CD — it usually has a fixed rate, a fixed term and penalties for early withdrawal. However, jumbo CDs require a much larger minimum deposit, usually at least $100,000. In exchange for the large opening deposit, jumbo CDs typically offer higher interest rates.
Best for:
Wealthy individuals who want to earn a high interest rate on a large amount of money they won’t need access to immediately.
High-yield CDs
High-yield CDs typically offer higher interest rates than traditional CDs. Like traditional CDs, high-yield CDs usually have fixed terms and rates as well as early withdrawal penalties. Minimum deposit amounts can vary by financial institution. Longer terms typically come with higher interest rates.
Best for:
Maximizing your earnings with CDs, especially when staggering multiple term end dates with a CD ladder.
Which type of CD is right for me?
The right CD for you depends on your financial situation and goals. Whether you’re saving for a specific goal in the near future, like a down payment for a home, or you’re just trying to earn more interest on your savings, different types of CD can support different needs. The most important thing to remember is that CDs usually have early withdrawal penalties and typically don’t allow you to deposit additional funds, so you should feel comfortable committing your initial deposit for the full CD term.
CD accounts: FAQs
What is a CD term?
When you open a CD, you agree to keep your money in that account for a certain amount of time, called a term. In general, you’ll pay a fee for withdrawing funds before the term ends. At the end of the term, the CD matures, and you can get your deposit back, plus interest.
What is a CD ladder?
You can build a CD ladder by opening several CDs, each with a different maturity date. That way, you can access some of your money earlier, if needed, or open another CD, if desired.
How can you pick the best type of CD?
Different types of CDs each have their benefits. In general, considering factors like total interest earnings, terms, accessibility and your financial situation can help you choose a CD that meets 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.
