What are CD Accounts and How Do They Work?

A certificate of deposit (CD), is a time deposit account that allows you to save by earning interest on deposited funds for a set period. You typically must keep your money in the CD account for a specific amount of time, called the “term.” If you withdraw the money early, you may be charged an early withdrawal penalty (usually a few months’ interest). However, there are exceptions to this, like no penalty CDs.

Let’s look at how CD accounts work, how you can benefit from them and what types are typically available.

How does a CD account work?

Certificate of deposit accounts are similar to regular savings accounts in several ways. You deposit funds and let those funds accumulate interest over time.

However, unlike a savings account, CDs only let you deposit your funds over a specified period, known as a term. This period typically ranges from a few months to a few years. Once the CD’s term has ended, the CD has reached maturity, and you can either collect your funds plus interest or roll over those funds and interest into another CD term. Many CDs automatically renew, but have a grace period of about 7 days after the term ends. During the grace period, you can withdraw or move your funds without penalty.

How much interest you earn depends on the initial deposit amount, term length and account’s APY. Depending on the type of CD, the APY may vary over the length of the CD account’s term. This is true, for example, for step up CDs. Typically, you’ll have an idea of either the increase to APY or the range in which your APY can vary ahead of time. Fixed rate CD APYs will not change during the term.

For most CD accounts, once you’ve deposited funds, you cannot withdraw money until the CD account has reached maturity. If you do, you’ll pay an early withdrawal penalty.

What are the benefits of a CD account?

CD accounts let you earn a specific interest rate on your deposits. Some certificate of deposit accounts offer higher APYs than a conventional savings account, which means you could earn more interest on your deposit over time.

And CD accounts, like other types of bank accounts, are federally insured if the bank or credit union is FDIC insured. This helps make CDs a less risky way to save money, because in the event the bank or credit union fails, you’re guaranteed to get your money back, up to FDIC limits.

Different types of CD accounts

There are several different types of CDs. Each offers different benefits that may suit different financial needs. 

No penalty CD

While most CD accounts will penalize you for withdrawing your funds before the term has ended, a no penalty CD typically allows you to withdraw funds after a specific period of time without paying the usual early withdrawal penalty, provided you meet certain conditions for early withdrawal. 

Different banks may have different conditions for avoiding an early withdrawal penalty, so make sure you understand the terms behind a no penalty CD before you deposit your funds.

Step up CD

A step up CD offers the benefits of a typical CD account, but in addition, the APY will increase to a specific rate at fixed intervals throughout the CD’s term. This can be helpful if you want the benefits of predetermined rate increases during the CD term. 

Fixed rate CD

Sometimes called a traditional CD, A fixed rate CD's APY will not change over the duration of the term. This can be helpful if you want to earn a set interest rate until the CD account reaches maturity.

When to use a CD account 

If you want to earn interest with funds you don’t need immediate access to, a CD account may be a good idea. Keep in mind that unless you decide to use a no penalty CD, you will be penalized for withdrawing funds from a CD account before the account reaches maturity. It’s best practice to only deposit funds in a CD if you don’t need them during the account’s term.

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.