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Baffled by certificates of deposit? Then you’re among 50% of Americans who report CDs are confusing, according to a study from Magnify Money. Let’s clear up any confusion about these nifty deposit accounts.
What is a CD?
Certificates of deposit (CDs) are deposit accounts offered by most banks and credit unions. They earn interest like savings accounts, but you keep your money in the account for a set period.
So in short, a CD is a type of savings account that “locks” your money away and earns interest on your deposited money.
When you open a CD, you make a one-time deposit. CDs have terms, which can be as short as one month or as long as 10 years. Over the course of your chosen term, your deposit earns interest. The interest rate is fixed, meaning the bank or credit union can’t adjust your rate (well, some CDs can have changing rates, but lets talk about that later).
For example: If you opened a 12-month CD with a 4% interest rate and deposited $1,000, you’d earn around $40 by the end of the term.
Hot tip: CDs vs savings
While both CDs and savings accounts are considered types of savings accounts, traditional savings accounts have variable interest rates. This means the financial institution could change your traditional savings account rate whenever it wants, whereas most CDs have a fixed interest rate for the entire term.
How much do CDs earn?
It depends on where you open the CD, how much you deposit and the CD’s term. Average rates for CDs based on term from the FDIC currently are:
1 month CD: 0.21%
3 month CD: 1.28%
6 month CD: 1.47%
12 month CD: 1.52%
24 month CD: 1.49%
36 month CD: 1.31%
48 month CD: 1.24%
60 month CD: 1.34%
If you’re wondering how the interest rate on CDs compounds, that depends on which bank or credit union you go to. Most CDs have monthly compounding interest, meaning the interest you’ve earned throughout the month is added to your deposited money either on a daily, weekly, monthly or yearly basis.
Once the CD approaches maturity, the bank or credit union will notify you that your CD’s term is almost up, and you’ll enter a “grace period.” A grace period is usually about a week, and during that time, you decide if you want to pull out your money, or renew the CD.
If you cash out the CD, you’ll choose where you’d like the bank to send your money. If you don’t close the CD, the bank usually renews your CD for the same or similar term length automatically.
What if I need to withdraw money from a CD early?
CDs have a contingency for this exact situation.
If you need to close your CD early, you’ll probably have to deal with “early withdrawal penalties.” Usually, you don’t pay these penalties upfront, and instead, the bank takes some of your earned interest. In most cases, early withdrawal penalties are around 90 to 180 days of earned interest. So while you can absolutely close a CD early, losing some interest is the tradeoff.
If early withdrawal penalties make you hesitant to open a CD, consider no-penalty CDs. These accounts are exactly what they sound like; they don’t charge early withdrawal penalties if you need to close the account early. What’s the catch? Usually shorter terms and lower interest rates than traditional CDs.
Yes, CDs are considered a safe deposit account and one of the most predicatable ways to earn interest on your cash. And as deposit accounts, CDs have deposit insurance, which means your funds are federally insured up to $250,000 in the unlikely event of a bank closure.
Is a CD right for me?
Maybe! Around 6.5% of American households report owning a CD, according to the 2022 Survey of Consumer Finances.
A CD may be the right savings route for you if you:
Have a separate emergency fund. CDs lock your money away, so in case of emergencies, it’s a good idea to have an emergency fund where you’ll keep funds accessible and ready to cover unexpected events.
Meet the deposit requirements. CDs almost always require a certain amount upfront, called an opening deposit, usually ranging from $100 to $1,000 for personal CDs. The CDs with the best rates may require higher deposits as well.
Want a higher rate. CDs tend to offer higher interest rates than traditional savings accounts, so moving funds out of your savings for a while can mean more earnings.
Won’t need those funds for a while. The sweet spot for the best CD rates tends to be around 12 to 18 months, so only open a CD if you’re prepared to leave the money alone for that long.
About 1 in 7 have a CD
CDs are a fairly popular form of savings, with 15% of savers saying they put their funds into a CD, according to our data.
CDs are rather straightforward, but if you’ve never opened one before, consider these key factors:
Interest rate. The most important factor when comparing CDs is the interest rate and how often it compounds. The best CD rates are leaps and bounds above national averages.
Minimum deposit. The amount of cash you need to open a CD can vary widely depending on the institution. In many cases, you only need a few hundred dollars, but some banks require several thousand.
Available terms. If you’re thinking about a big purchase in the next few years — like buying a home — focus on shorter terms that can free your cash for a hefty down payment.
Potential fees. You never know what life will throw at you. Ask about fees for early withdrawals, just in case you can’t wait out the term or consider opening a no-penalty CD.
Pros and cons of CDs
CDs have more benefits than downsides, but they’re not for everyone.
Guaranteed returns. When you invest your money in a CD account, you’ll earn a guaranteed rate after your deposit matures. This protects you against any interest rate drops since your rate is locked in.
High interest rates. CDs allow you to earn a better interest rate on your money than most savings accounts can offer.
Variety of terms. Most banks and credit unions offer CDs as short as three months to as long as 10 years.
Opportunity cost. If interest rates go up, you lose out. Even if the bank’s interest rates rise while your money is locked away in a CD, your rate stays the same.
Funds are locked. If you need to access your funds before the term’s end, you’ll pay an early withdrawal penalty on the interest you’ve earned, which can be as much as 90 to 180 days’ worth of interest.
Can’t add more money. Once you’ve made your initial deposit, you can’t continue adding money to the CD for the entire term.
Certificate of deposit alternatives
A CD isn’t your only option when it comes to saving money. A savings account or money market account may make more sense based on your needs and goals.
If you have the time and money to lock away your savings for higher interest rates over a term of six months to five years or more, consider a CD. These safe investment tools guarantee a return on your investment, though with a potential disadvantage of penalties and fees if you can’t wait until your CD fully matures.
Compare more bank account options, such as checking, high-yield savings, kids’ banking and money market accounts.
Frequently asked questions
Do I have to pay taxes on CDs?
Yes, you’re required to pay taxes on the interest you earn; even if it’s just $1. Like traditional savings accounts, the interest your CD earned is reported to the IRS and is treated as taxable income. Your bank will send Form 1099-INT for any account for which you’ve earned at least $10 in interest.
How much will $10,000 make in a 6-month CD?
It depends on your exact interest rate, but assuming the average 1.47% rate as of April 2026, a $10,000 deposit on a 6-month CD will earn about $73. If you had a higher rate, like around 4%, then a $10,000 deposit in a 6-month CD could earn around $201.
What is the biggest negative of putting your money in a CD?
Lack of access. Since CDs are locked deposit accounts, you won’t be able to access your deposited funds until the CD term is over. You could close the CD to get the funds early, but then you’ll probably pay a penalty.
Bethany Hickey is the banking editor and personal finance expert at Finder, specializing in banking, lending, insurance, and crypto.
Bethany’s expertise in personal finance has garnered recognition from esteemed media outlets, such as Nasdaq, MSN, Yahoo Finance, GOBankingRates, SuperMoney, AOL and Newsweek. Her articles offer practical financial strategies to Americans, empowering them to make decisions that meet their financial goals. Her past work includes articles on generational spending and saving habits, lending, budgeting and managing debt.
Before joining Finder, she was a content manager where she wrote hundreds of articles and news pieces on auto financing and credit repair for CarsDirect, Auto Credit Express and The Car Connection, among others.
Bethany holds a BA in English from the University of Michigan-Flint, and was poetry editor for the university’s Qua Literary and Fine Arts Magazine.
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Cassidy Horton is a freelance personal finance copywriter and past contributing writer for Finder. Her writing and banking expertise have been featured in Forbes Advisor, Money, The Balance, Money Under 30, Insure.com, and other top digital publishers. She holds a BS in public relations and an MBA from Georgia Southern University.
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See what the average interest rate was in the US for 3-month, 60-month, 1-year, 3-year and 5-year CDs since 2009 and learn how the economy affects rates.
Money market accounts offer easy access to your money, while CDs lock your savings away for a set time and often have higher interest rates.
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