What Is a Certificate of Deposit (CD)?

How a Certificate of Deposit Works

When you open a CD, you agree to deposit a certain amount of money for a set period—often 6 months, 1 year, or even 5 years. In exchange, the bank offers you a higher interest rate than a regular savings account. But here's the catch: you usually can’t access your money early without paying a penalty.

Why It Matters

CDs are important because they help people save with a sense of discipline. Since your money is locked in, you're less likely to spend it impulsively. CDs also offer predictable returns, making them a solid option for conservative savers or for short-term goals like buying a car or planning a wedding.

Example

Let’s say you put $5,000 into a 1-year CD with a 4.5% annual percentage yield (APY). After one year, you’ll earn $225 in interest. Unlike the stock market, your return is guaranteed—and FDIC insured up to $250,000 per bank.

Types of CDs

• Traditional CD: Fixed rate and term.
• No-Penalty CD: Withdraw early without fees.
• Bump-Up CD: Allows you to raise your rate once if rates go up.
• Jumbo CD: Large deposits ($100,000+), often with higher rates.

Pros and Cons

A Brief History of CDs

Certificates of Deposit have been around since the early 20th century as a way for banks to secure stable funding. Over time, they became a staple of American savings culture, especially during periods of high interest rates like the 1980s. Today, online banks often offer some of the highest CD rates available.

Compare With Other Options

While CDs are great for risk-averse savers, they may not be the best choice if you need liquidity or want higher returns. Alternatives include:

• High-Yield Savings Accounts
• Low-Risk Investments
• Emergency Funds

Bottom Line

Certificates of Deposit are simple, safe, and structured savings tools. If you want guaranteed returns and don’t need immediate access to your money, a CD can be a smart move—especially when interest rates are high.