Certificates of deposit, known as CDs, offer higher-than-typical interest rates in exchange for leaving your money in place for a period of time. You can open a CD at a bank, credit union or brokerage, and typically you'll have the option to do so online, by phone or in person.
Before applying for and funding the account, it's important to make sure you've chosen the right CD for your goals. Follow these steps to open a CD account with confidence.
How to Open a CD
Once you've decided that a CD is the best way to save your money, take these steps to choose the CD that best matches your needs.
1. Review CD Options
There's more than one type of CD, and several different ways financial institutions structure their interest rates and fees. For example, you may decide to go with a bump-up CD if you expect the Federal Reserve to raise interest rates during your CD term, since you'll have the option to adjust your rate to the market rate. Here are the various types of CDs you'll have to choose from.
Types of CDs
- Traditional CDs: In their basic format, CDs are vehicles for saving and investing that provide a guaranteed rate of return and insurance on up to $250,000 per account holder at banks and credit unions. You'll need to keep your money in the account for a fixed term, such as six months or a year, otherwise you may pay an early withdrawal penalty. Typically, you'll receive the interest you've earned at the end of the CD's term.
- No-penalty CDs: These CDs allow you to withdraw your entire balance (not a portion of it) as soon as a week after you've funded the account without a penalty. A no-penalty CD may come with lower rates or additional fees, but it depends on the financial institution.
- Jumbo CDs: A jumbo CD requires a much higher initial deposit, usually $75,000 to $100,000, and in return, you'll receive a higher interest rate.
- Bump-up CDs: A bump-up CD offers the opportunity to increase your interest rate if it's gone up since you first opened the account. You'll have to request the change, and it may only be available one time during your term. You may receive a lower initial rate than you would on a traditional CD in exchange for this option.
- Step-up CDs: A step-up CD, similar to a bump-up CD, incorporates the option to increase your interest rate throughout the term. But the financial institution will make the change automatically at predetermined times, such as every seven months over a 28-month term.
- Brokered CDs: You can buy this type of CD through a brokerage firm, rather than a bank. A brokered CD often carries a higher interest rate and the option to get your money before the maturity date penalty-free. On the other hand, you may potentially pay extra fees and face the possibility the broker will "call" the CD, or end the CD's term early, requiring you to find another issuer and open a new CD.
- IRA CDs: As part of your retirement savings strategy, you can invest in an IRA CD, which provides security in the form of guaranteed interest. You can save in an IRA CD either as a standalone account or within your current retirement portfolio. But you'll miss out on potential greater returns from stock investing, so be sure to maintain a balanced individual retirement account portfolio that includes other investment options.
Find High-Yield CDs
2. Compare Interest Rates, Terms and Fees
Because a high interest rate is often the primary benefit of choosing a CD, compare rates among various CDs to find the best one. You can start by checking in with CD rates available at your existing bank or credit union, then compare their offers to current rates at other banks, credit unions, brokers and online lenders. Rates can change often, so check back regularly.
Keep in mind that your rate will likely be higher the longer the term you choose, so identify how long you're comfortable keeping your money locked up. While you can always go for a no-penalty CD, you won't be able to access the highest possible rates that way.
You may also find promotional CD rates, which are even higher than what the financial institution usually offers for a period of time. Take a close look at each CD offer to make sure you understand all fees, including early withdrawal penalties and intermediary fees for brokered CDs, and when your rate could change if it's a promotional, step-up or bump-up CD.
3. Apply for the CD
You can apply for the CD you've chosen online, or in person or by phone if you wish. When you apply, you'll receive a disclosure statement with more details about how the CD works. Find out, for example, when, how often and by what means—such as by check or direct deposit, for example—your interest will be paid to you.
Understand, too, whether it's possible the CD could be called by the issuer. That means the CD term will end. You'll get your money back plus interest accrued, but you'll need to find another CD account elsewhere.
4. Fund the CD
To start earning interest on your CD, make an opening deposit either online or in person. Some CDs, such as jumbo CDs, may require a minimum deposit, while others do not. You won't add money regularly to a CD like you would to a traditional savings account. Deposit an amount that you're comfortable going without during the CD's term (six months, one year or five years, for example).
Yes, CDs you get at banks and credit unions are insured up to a certain amount per account holder. The Federal Deposit Insurance Corp. (FDIC) insures deposits at banks up to $250,000 per account holder and ownership category, while the National Credit Union Administration (NCUA) does the same for CDs opened at credit unions. If you have CDs and other deposit accounts, such as checking and savings, with a bank or credit union, federal insurance will cover you for a total of $250,000 per account holder.
Yes, but only during certain periods or if you choose an add-on CD. Issuers of traditional CDs typically say, for example, that you can add money during the 10-day grace period after the date your CD matures or the initial term ends. This is also the time when you can withdraw money without penalty, or simply leave your money there and let the CD renew.
An add-on CD, however, is a specific type of account that lets you add money throughout the term. They're not available at all banks and credit unions.
When a CD matures—meaning it's reached the end of its term—you can choose whether to take the money out of the account, plus all the interest accrued, or renew the CD. Some banks and credit unions will automatically renew the CD at the current rate unless you request otherwise. But you will receive notification from the issuer before an automatic renewal happens so you can make the decision.
The Bottom Line
Saving in a CD is a smart way to earn more interest than you would if your money stayed in a traditional savings account, but it's also safer than investing only or primarily in stocks or other more volatile instruments. To best take advantage of a CD's unique features, open the CD that best fits your personal financial goals—in the type of CD, the length of the term, the type of interest rate and the method of renewal.