11 CD Terms You Need to Know

Quick Answer

Important CD terms that you should know include annual percentage yield (APY), term length, maturity date, minimum opening deposit and early withdrawal penalty.

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A certificate of deposit (CD) is an interest-bearing account that can help grow your savings at a faster clip. Unlike a traditional savings account, funds are typically locked into a CD for a predetermined amount of time, but you can expect higher-than-average interest rates. A CD can make sense if you're looking for a low-risk investment and don't mind sacrificing liquidity. Here are some key terms you need to know to get the most out of your money and avoid fees.

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1. Annual Percentage Yield (APY)

The APY refers to the interest you'll earn on a CD. The higher the yield, the better the return—assuming you avoid early withdrawal penalties. APYs vary from one financial institution to the next, but they generally follow the federal funds rate. This is the target interest rate set by the Federal Reserve. When the federal funds rate goes up, CD rates usually do too. The opposite is also true. As of January 2024, CD rates are well over 5%. CDs typically have fixed rates.

2. Term Length

The CD term is how long it will take for the account to mature. This can range anywhere from one month to five years. During this time, most CDs require you to leave your money in the account. A short-term CD may be a better option if you think you'll need those funds sooner. Longer terms might translate to higher APYs, but not always. Comparing rates and terms from several financial institutions can help you find the best fit.

3. Maturity Date

The maturity date is when a CD's term expires, and it should be clear when you open the account. When a CD matures, you'll generally have seven to 10 days to decide what to do with your cash. At that point, the CD will either renew automatically or the financial institution will send you a check for your balance. Alternatively, you can:

  • Roll your money into a new CD of your choosing
  • Put your funds toward a financial goal
  • Spend your money however you like

4. Minimum Opening Deposit

You may need to make a minimum deposit when opening a CD. This typically ranges anywhere from $500 to $2,500, but that isn't set in stone. Some CDs have no deposit requirements; others require at least $100,000. These "jumbo CDs" generally offer higher interest rates. Either way, most CDs do not allow you to add more funds to your account after it's opened.

5. Early Withdrawal Penalty

When you open a CD, you agree to leave your money in the account until it matures. You're essentially trading liquidity for a fixed interest rate and term length. Taking money out of the account early usually triggers an early withdrawal penalty. Fees vary depending on the term length, financial institution and amount you withdraw, but it could be as much as 540 days' worth of interest.

6. CD Barbell

This CD saving strategy involves opening one short-term CD and another long-term one. Ideally, the CD with the longer maturity period will pay a higher yield. Meanwhile, the short-term CD provides liquidity and can be used for more immediate financial goals. A CD barbell could come in handy if you need cash for a financial emergency or new investment opportunity.

7. CD Ladder

With a CD ladder, the idea is to put money into several CDs that have different term lengths. This way they'll expire on a staggering basis, unlocking money as you go along. As they mature, you can either reinvest your funds to continue earning interest or spend your money as you like.

8. Bump-Up CD

One downside of a CD is that you could miss out on better yields if interest rates go up during your maturity period. A bump-up CD allows you to request an increase to reflect current market rates—usually as a one-time benefit. However, bump-up CDs tend to have lower initial yields than CDs that don't offer rate adjustments.

9. Step-Up CD

Like a bump-up CD, a step-up CD also allows you to increase your interest rate. This will happen automatically at predetermined intervals. That may be annually or every six months. A step-up CD can be worth it if market rates indeed go up, but starter rates are typically less than what you'd get with a traditional CD. Interest rate trends and your risk tolerance will determine if it's a good strategy for you.

10. IRA CD

An IRA CD is a CD that's invested for retirement. It provides the tax benefits of an IRA with the stability and attractive yields of a CD. Like a traditional CD, you'll earn a fixed interest rate for a predetermined amount of time. One potential drawback is that you could face steeper early withdrawal penalties if you need your funds sooner than expected.

11. Interest Rate Risk

There's always the chance that you'll open a CD, then miss out on better returns if rates increase after the fact. This is known as interest rate risk. A CD ladder, CD barbell, step-up CD or bump-up CD can all help mitigate that risk. If you find yourself in a low-rate environment, you'll have to decide if CDs are the best investment. You might allocate a larger portion of your portfolio to stocks or other high-return investments. Like all investing, the best approach will depend on your risk tolerance and financial goals.