A certificate of deposit, or CD, can offer a guaranteed return on your savings with minimal risk. But there’s a catch: for most CD accounts, you’ll need to lock your money up for a set period of time to earn the return.
In the simplest terms, here’s how a CD generally works: You’ll make a one-time deposit into an account that comes with an annual percentage yield, or APY. To earn interest, you’ll need to leave the money in the CD for the term you choose when opening an account. If you take money out of the account before the CD term ends, you’ll pay an early withdrawal fee.
Opening a CD is pretty straightforward. The process is similar to opening a new bank account, and CDs are commonly available at many banks. Depending on the bank, you may be able to open the account online in just a few minutes. But before you do, you’ll need to decide what type of CD you want to open and how much cash you want to set aside.
Here’s a step-by-step guide that explains how to open a CD and what you’ll need to get started.
1. Decide on the type of CD
While some banks might offer only traditional or high-yield CDs, there are several types of CDs to choose from. Some offer a higher APY, while others give the flexibility to add or withdraw money when needed. Since you’re locking your money up for a set period of time, it’s best to choose one that matches your goals and financial needs. Here are a few types of CDs to consider:
Online-only banks usually offer high-yield CDs that pay a higher interest rate than traditional CDs offered at bigger banks with physical branch networks. That’s because the banks often have lower overhead costs and can pass some of these savings down to customers through better savings and CD rates.
Most terms for this type of CD range from six months to five years delivering interest on your deposit for a fixed term. But you’ll generally pay an early withdrawal fee if you need the money sooner.
Instead of making a one-time deposit, an add-on CD allows you to make additional contributions to your CD account balance. But keep in mind that not all banks offer add-on CDs and most have limitations, including one term and a lower APY than high-yield CDs. Experts say this type of CD is best if rates are decreasing and you want to lock in a good CD rate but continue adding money later if you get a work bonus or tax refund. Usually, interest rates move alongside the Federal Reserve’s decision to raise or lower its federal funds rate, and banks usually follow suit.
Unlike a high-yield CD, a no-penalty CD lets you withdraw funds from your CD without paying an early withdrawal penalty. No-penalty CDs generally let you withdraw funds any time before the CD’s maturity rate, though you might have to leave your money in the account for at least a week after opening before withdrawing.
However, even the best no-penalty CDs offer rates lower than a high-yield CD, and there might be fewer term options for this type of CD than with a conventional one. And keep in mind that you’ll still only be able to make the original deposit with no-penalty CDs.
Bump-up CDs come in handy during a rising rate environment because you can request your CD be “bumped up” to the new interest rate if a better rate comes along. However, most banks allow you to request the rate increase only once. If rates remain stagnant for some time or go down, this type of CD won’t be as valuable.
2. Choose your CD term
A CD term refers to how long you will leave your money in the account. Depending on the CD type, you may not have access to your balance during this time -- unless you have a no-penalty CD or you’re OK with paying the withdrawal penalty. But in general, the longer the CD term, the longer you’ll want to leave that money in the account. That’s why experts say CDs can be great as a supplement to an emergency fund that you keep in a more liquid high-yield savings account. That way, you’ll have access to emergency funds if you need them while additional savings sit in a CD until maturity.
When choosing your term, you’ll also want to consider your goals. For instance, are you saving to buy a car in two years or for a vacation you plan to book in six months? If you’re using a CD as part of a savings strategy for a specific upcoming purchase, it’s best to choose a timeline that aligns with your goal for the funds. If you choose a five-year term, but that family vacation is next year, you’ll face a penalty for early withdrawal when the time comes to book a flight. In that case, you’d be better off going with a six-month or one-year term. On the other hand, if you’re looking to lock in a good rate on a CD to save money for your kid’s college tuition in 10 years, a five-year CD term could be exactly what you want.
3. Select a bank or credit union
When you’ve narrowed your CD type and term, it’s time to start shopping for the best CD rates and account features. Here are some things to look for when shopping for a CD.
Online vs. in-person banking
Banks and credit unions change their rates on CDs partly in response to changes in the Federal Reserve’s rate, and they also compete with one another to offer competitive rates. Online banks tend to offer higher annual percentage yields and lower fees than brick-and-mortar banks because they have fewer overhead expenses. But you’ll need to be comfortable fully managing your account online.
“If you’re someone who prefers digital-only interactions, then online banks are great,” said Billy Cho, a savings expert and Manhattan market leader at Citi. “But if you’re someone who doesn’t want to be bound to one way of banking, then choosing an institution that offers both online and hybrid CDs may be a better fit.”
To protect your money, it’s best to stick to FDIC- or NCUA-insured banks to protect your funds up to $250,000 per person, per account in case of a bank failure. Usually, you’ll see the FDIC or NCUA logo on the app, website or in the physical branch. Our list of the best CD rates only includes rates from banks that have this insurance for its customers, and experts advise taking a pass on any bank or institution that doesn’t offer it.
“With the recent bank uncertainties, FDIC and NCUA insurance is crucial for consumers,” said Jamilah McCluney, a fiduciary and financial advisor for Black Wealth Financial. “The fear of loss is lessened with the guarantee they offer, and purchasers can feel safe with certainty that their funds are protected up to a certain amount.”
Fees and features
Aside from insurance and choosing the best rate, choose a bank that meets your financial needs. “Always look for a bank that offers the level of flexibility you need,” Cho said. “If you think you might need to withdraw money at some point before the term limit is up, you should prioritize picking a bank that offers no penalty CDs.”
You may choose a bank with branch access to set up your account in person. Or you may choose one because it has fewer fees. Be sure to pay attention to any minimum requirements, fees and other limitations that may make it difficult to manage the account, McCluney said.
4. Apply for a CD
Once you select a bank, it’s time to apply. To open a CD account, you need the following:
- Photo ID
- Name, phone number, address and email
- Social Security number and date of birth
- Your initial, and in most cases, one-time deposit
Depending on the bank, you can apply online, over the phone or in person at a branch. While online and phone applications are convenient and easy, some banks and credit unions may require you to visit a branch to open a CD account.
5. Pay the deposit
You’ll need a one-time deposit to earn interest when you open a CD account. Some banks require a minimum deposit to open an account, and others will close your account if it sits unfunded for a certain time.
How you’ll be able to fund your account will depend on the bank. Most allow you to transfer money from an external bank account, mail a check or direct deposit. If you opened your CD account at your current bank, it may be as simple as transferring funds from your checking or savings account.
The bottom line
Opening a CD can be an effective way to earn interest on cash you don’t plan to touch for a while. It’s also an opportunity to supplement an existing emergency savings account.
But there is a shortlist of things to consider before opening an account with your local branch or an online bank. Understanding your financial goals before opening a CD can make it easier to decide the type of account you should get. Also, consider the features you would like to take advantage of, such as higher APYs or no-penalty withdrawals. You should also consider any potential fees before settling on the right fit for your savings goals.
Correction: An earlier version of this article was assisted by an AI engine and it mischaracterized some aspects of CDs. Those points were all corrected. This version has been substantially updated by a staff writer.
As an avid financial enthusiast with a deep understanding of various investment tools, including certificates of deposit (CDs), I am here to shed light on the intricacies of CDs and provide valuable insights. My experience in financial management and investment strategy positions me as a reliable source for this discussion.
Let's delve into the concepts mentioned in the article:
Certificate of Deposit (CD) Overview:
A Certificate of Deposit is a financial product that offers a guaranteed return on savings with minimal risk. The key characteristic is that you lock your money for a set period to earn a return.
One-Time Deposit and Annual Percentage Yield (APY):
- Make a single deposit into a CD account.
- The account comes with an annual percentage yield (APY), representing the interest rate.
Interest and Early Withdrawal Fee:
- To earn interest, you must leave the money in the CD for the chosen term.
- Early withdrawal incurs a fee, emphasizing the commitment to the set period.
Types of CDs:
- Offered by online-only banks.
- Higher interest rates due to lower overhead costs.
- Terms usually range from six months to five years.
- Allows additional contributions to the CD.
- Best suited when rates are decreasing, and you want to lock in a good rate.
- Enables withdrawal without an early penalty.
- Generally lower rates than high-yield CDs.
- Useful in a rising rate environment.
- Allows requesting a rate increase if better rates emerge.
Steps to Open a CD:
Decide on CD Type:
- Choose based on your financial goals and needs.
Choose CD Term:
- Select the duration you're willing to leave the money in the account.
Select a Bank or Credit Union:
- Consider online vs. in-person banking.
- Ensure FDIC or NCUA insurance for funds protection.
Apply for a CD:
- Provide necessary information (ID, contact details, Social Security number).
- Apply online, over the phone, or in person.
Pay the Deposit:
- Make a one-time deposit to fund the CD account.
Choosing a Bank:
Online vs. In-Person Banking:
- Online banks often offer higher APYs and lower fees due to fewer overhead expenses.
- Stick to FDIC or NCUA-insured banks for fund protection up to $250,000 per person.
Fees and Features:
- Choose a bank that aligns with your financial needs and offers flexibility.
In conclusion, opening a CD can be a strategic move to earn interest on long-term savings, but it requires careful consideration of your financial goals and the specific features of the CD. Always be mindful of the terms, rates, and potential fees associated with different types of CDs and choose a bank that meets your needs while ensuring the safety of your funds.