Pros and Cons of Short-Term CDs

Pros of Short-Term CDs

Short-term CDs could help diversify your portfolio and allow your money to work a little harder for you. Here are the main advantages of these low-risk investments.

Lower Interest Rate Risk

CDs typically have fixed interest rates. When your money is tied up in a long-term CD, there's always the risk that annual percentage yields (APYs) will increase while you're waiting for the account to mature—and that could mean missing out on those higher rates. But interest rate risk is lower with a short-term CD.

If rates do go up, and you want to get your money into a new CD sooner rather than later, you won't have to wait as long. When your short-term CD expires, you can take your opening deposit, plus the interest you earned, and reinvest it into a new CD with a higher yield.

Quicker Access to Funds

Pulling money out of a CD early usually triggers a penalty (more on this in a moment). One of the biggest draws of a short-term CD is that you'll have access to your money relatively soon. Short-term CDs typically have terms that last 12 months or less. If you have cash sitting in a long-term CD, and you want to tap those funds, you'll have to run out the clock to avoid getting hit with an early withdrawal penalty.

FDIC and NCUA Insurance

Unlike volatile investments like stocks, CDs carry very little risk. Virtually all CDs that are offered by banks are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000 per depositor, per institution. Similar coverage is provided to CDs from credit unions by the National Credit Union Administration (NCUA). That means it's highly unlikely that you'd lose money with a CD.

Learn more: Short-Term vs. Long-Term CDs: Which Is Best for You?

Cons of Short-Term CDs

Like any financial product, short-term CDs come with drawbacks. You'll want to consider the following cons before opening this type of account.

Lower Yields

Short-term CDs have historically offered lower APYs when compared to CDs with longer maturity periods. This is meant to encourage consumers to keep their money invested for a longer stretch of time. As a result, you might not earn as much interest with a short-term CD.

But this isn't a hard-and-fast rule. If interest rates are on the decline, or expected to drop soon, yields might actually be higher with a short-term CD. As of August 2025, some one-year CDs have APYs as high as 4.40%. However, it's difficult to find a five-year CD with a rate higher than 4.28%. Interest rates aside, banks and credit unions might offer higher promotional rates on short-term CDs to attract new customers. The main takeaway is that it's important to shop around and compare rates before opening a CD, regardless of the term length.

Early Withdrawal Penalties

You can generally expect an early withdrawal penalty if you take money out of a CD before the term ends. The fee will depend on the financial institution, your term length and how much money you have in the CD, but it could range from three to six months' worth of interest. That could take a big bite out of your earnings.

No-penalty CDs offer more flexible access to your funds, but APYs are generally lower when compared to traditional CDs.

Reinvestment Risk

Once a CD expires, you'll get back your initial deposit plus interest. You can either put that money toward your financial goals or reinvest the funds into a new CD—preferably with a higher APY. But if rates have declined, you won't earn as much as you did the first time around. This is known as reinvestment risk, and you may be more vulnerable to it with a short-term CD. That's because a long-term CD could potentially lock in a competitive rate for a longer period of time.

How to Open a Short-Term CD

Opening a short-term CD is a relatively simple process. Here's a step-by-step guide to get you started.

1. Choose the right short-term CD for you. There are several different types of CDs, so your first task is selecting the one that makes the most sense for your finances. Bump-up CDs and step-up CDs allow you to adjust your APY if rates increase during your CD term. You could also explore brokered CDs, which you can open through a brokerage firm.
2. Shop around for the best rates. CD rates can vary widely depending on the financial institution and your deposit amount. It's in your best interest to compare APYs and fees to find the best short-term CD for your goals.
3. Open your CD. You may be able to do this quickly online. Be prepared to provide your Social Security number, proof of address, government-issued photo ID and other basic information. Once your application is approved, you can make your opening deposit and start earning. Interest payments may be disbursed monthly, annually or at maturity.

Learn more: Best CD Rates

Alternatives to Short-Term CDs

Short-term CDs aren't for everyone. If that applies to you, consider these alternatives:

• Long-term CD: If you don't have an immediate need for the money, you could park those funds in a CD that has a longer term. That could get you a better APY—and you may be discouraged from making an early withdrawal if there's a penalty. That can help protect your savings.
• High-yield savings account: If you want easy access to your money, a high-yield savings account might be a good option. As of August 2025, some APYs are as high as 5.00%, and unlike a CD, you can add funds whenever you like.
• Money market account: A money market account is similar to a savings account. Your cash will earn interest, but it's a bit easier to make withdrawals as most accounts come with a checkbook or debit card. As of August 2025, it's possible to find APYs up to 4.80%.

The Bottom Line

Are short-term CDs a good idea? This type of CD may be a good fit if you're saving for a near-term goal. It's possible to find a competitive interest rate, and you won't have to wait too long to unlock your money. At that point, you might reinvest those funds or use it for other things. But short-term CDs do come with early withdrawal penalties and reinvestment risk, so you'll want to be strategic about the term length you choose.