What Is a Certificate of Deposit & How Does It Work?

If you’re looking to open a savings account for a long-term savings goal, a certificate of deposit might be an option to explore. Even in a low interest rate environment, a certificate of deposit can earn interest on your balance, which may be more than that of a traditional savings account. CDs, on the other hand, are better for funds you won’t need for a given amount of time. Although CDs may offer a higher rate than a traditional savings account, early withdrawal penalties can quickly diminish the return that you earn. As we’ve mentioned, shopping around is imperative if you want to earn the top rate on your CD investments.

  • You can choose from whatever term lengths are available, and you can expect interest to accrue and compound as long as the funds remain in the account.
  • Its communication will also include instructions on how to tell them what to do with the maturing funds.
  • If you don’t like the idea of a one-time deposit, an add-on CD gives you the option to deposit more funds to increase your earnings.
  • Take advantage of today’s high rates by opening a federally insured certificate of deposit.

Traditional CDs usually carry early withdrawal penalties equal to some of your interest earnings. You can choose various terms for your CD that typically range between a month and several years. During this time, you leave your money in the CD account until the maturity date, or the date the term ends. At the maturity date, you can remove your original deposit plus interest earnings or roll over the amount and interest into a new CD.

What’s a CD ladder? Is it worth it?

We believe everyone should be able to make financial decisions with confidence. Certificates of deposit are completely safe as long as they’re FDIC-insured. If a CD is FDIC-insured, then your principal investment is safe, even if the entity that issued the CD defaults. If the CD isn’t FDIC-insured, then you won’t enjoy those same protections.

  • CD deposits at banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per account ownership type and per institution.
  • Remember that if you withdraw your money before the maturity date, you’ll likely pay a penalty of several months’ interest.
  • The standard insurance coverage is currently $250,000 per owner or depositor for single accounts or $250,000 per co-owner for joint accounts.
  • You don’t want to base your decision solely on what rates are available, but it’s helpful to know where rates are going.
  • The responsibility for maintaining the ladder falls on the depositor, not the financial institution.
  • Consumers who want a hard copy that verifies their CD purchase may request a paper statement from the bank, or print out their own from the financial institution’s online banking service.

You’ll get a comparatively lower interest rate with most three-month CDs than with 12-month CDs, for example. Common time periods for CDs are three, six, 12, 24 or 60 months. Take care not to sign up for a CD with a maturity too far in the future. You don’t want your money tied up when you need it, especially as it’ll cost you to withdraw it early. After choosing the type of CD you’d like to open, you’ll need to contact the financial institution. Depending on your bank, you may be able to open a certificate of deposit account in person at a branch, over the phone or online.

Everyday money matters

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certificate of deposit account definition

They might offer higher rates, more flexibility, or other features. Second, you’ll want to consider what’s expected to happen with the Fed’s rate. Conversely, an expectation that rates will decrease in the near term may trigger you to want long-term CDs, so you can lock in today’s higher rates for years to come. Note that the range of CD rates across different institutions can vary widely.


Regardless of the duration of a CD, the issuing bank is bound to pay off the coupons to the holder. A certificate of deposit, also referred to as a CD, is a time deposit certificate of deposit account definition at a bank, credit union, or other financial institution. A certificate of deposit requires that the money cannot be accessed until an agreed upon maturity date.

  • From that point on, a CD reaches maturity every year, at which time the investor can re-invest at a 3-year term.
  • Our experts have been helping you master your money for over four decades.
  • For example, in mid-2004, interest rates were expected to rise—and many banks and credit unions began to offer CDs with a “bump-up” feature.
  • CDs and savings accounts both help you save money and earn interest, but choosing between them can be difficult.
  • They’re less useful for money you might need to access quickly, such as an emergency fund.
  • A CD, or certificate of deposit, is a type of savings account with a fixed interest rate that’s usually higher than a regular savings account.
  • A year later, your initial 2-year CD will mature, and you’ll invest those funds into another 5-year CD.

] A little later, the opposite happened, and inflation declined. The federally required “Truth in Savings” booklet, or other disclosure document that gives the terms of the CD, must be made available before the purchase. Employees of the institution are generally not familiar with this information[citation needed]; only the written document carries legal weight. Typically, the beginning interest rate is higher than what is available on shorter-maturity CDs, and the rate increases with each step-up period. While a CD could be a good savings tool for many scenarios, there are a lot of reasons you may not want to put your money in a CD. It depends on your financial needs and some external market conditions.

We’re here to help you manage your money today and tomorrow

And the odds are low that the bank where your CD is maturing is currently a top-rate provider among the hundreds of banks and credit unions from which you can choose a CD. It’s possible that you’ll do well with a rolled-over CD, but the probabilities are against you, and shopping around is always your better bet. Each bank and credit union https://personal-accounting.org/do-unearned-revenues-go-towards-revenues-in-income/ establishes a minimum deposit required to open each CD on its menu. Certificates of deposit, or CDs, offer the unique opportunity to earn guaranteed returns and fixed interest, making them a low-risk and rewarding savings tool. If you have cash you don’t mind locking up, you can often earn more with a CD than with other savings accounts.

certificate of deposit account definition

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