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.