CD (certificate of deposit)

How it works

You deposit a lump sum and agree to leave it for the term, commonly anywhere from six months to five years. In return, the bank or credit union pays interest until maturity. Many CDs pay a fixed rate for the whole term, while variable-rate CDs can move with market rates. At maturity, the money and its earned interest become available to withdraw or to roll into another CD.

The trade-off is access. Pulling money out early usually costs a penalty, commonly taken from the interest the CD has earned, and it can cut into principal if little interest has been earned yet, so a CD suits money you do not expect to need before maturity. A fixed rate cuts both ways: it holds steady if market rates fall, but stays put if they rise. Some savers split money across CDs with different maturity dates, called a CD ladder, so part of it becomes available at regular intervals.

CDs at insured banks are covered by FDIC insurance, and those at federally insured credit unions by NCUA insurance, within the $250,000 limits. Before opening one, it helps to know the exact penalty formula, the maturity date and what happens if you do nothing when the term ends. Some long-term CDs are callable, meaning the bank can end them early, for example if rates fall.

Related terms

Sources and further reading

• CFPB: What is a certificate of deposit?
• FINRA: Bank products (CDs)

Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.