A certificate of deposit, or CD, can offer a guaranteed return on your savings with minimal risk. But there’s a catch: for most CD accounts, you’ll need to lock your money up for a set period of time to earn the return.
In the simplest terms, here’s how a CD generally works: You’ll make a one-time deposit into an account that comes with an annual percentage yield, or APY. To earn interest, you’ll need to leave the money in the CD for the term you choose when opening an account. If you take money out of the account before the CD term ends, you’ll pay an early withdrawal fee.
Opening a CD is pretty straightforward. The process is similar to opening a new bank account, and CDs are commonly available at many banks. Depending on the bank, you may be able to open the account online in just a few minutes. But before you do, you’ll need to decide what type of CD you want to open and how much cash you want to set aside.
Here’s a step-by-step guide that explains how to open a CD and what you’ll need to get started.
1. Decide on the type of CD
While some banks might offer only traditional or high-yield CDs, there are several types of CDs to choose from. Some offer a higher APY, while others give the flexibility to add or withdraw money when needed. Since you’re locking your money up for a set period of time, it’s best to choose one that matches your goals and financial needs. Here are a few types of CDs to consider:
High-yield CD
Online-only banks usually offer high-yield CDs that pay a higher interest rate than traditional CDs offered at bigger banks with physical branch networks. That’s because the banks often have lower overhead costs and can pass some of these savings down to customers through better savings and CD rates.
Most terms for this type of CD range from six months to five years delivering interest on your deposit for a fixed term. But you’ll generally pay an early withdrawal fee if you need the money sooner.
Add-on CD
Instead of making a one-time deposit, an add-on CD allows you to make additional contributions to your CD account balance. But keep in mind that not all banks offer add-on CDs and most have limitations, including one term and a lower APY than high-yield CDs. Experts say this type of CD is best if rates are decreasing and you want to lock in a good CD rate but continue adding money later if you get a work bonus or tax refund. Usually, interest rates move alongside the Federal Reserve’s decision to raise or lower its federal funds rate, and banks usually follow suit.
No-penalty CD
Unlike a high-yield CD, a no-penalty CD lets you withdraw funds from your CD without paying an early withdrawal penalty. No-penalty CDs generally let you withdraw funds any time before the CD’s maturity rate, though you might have to leave your money in the account for at least a week after opening before withdrawing.
However, even the best no-penalty CDs offer rates lower than a high-yield CD, and there might be fewer term options for this type of CD than with a conventional one. And keep in mind that you’ll still only be able to make the original deposit with no-penalty CDs.
Bump-up CD
Bump-up CDs come in handy during a rising rate environment because you can request your CD be “bumped up” to the new interest rate if a better rate comes along. However, most banks allow you to request the rate increase only once. If rates remain stagnant for some time or go down, this type of CD won’t be as valuable.
2. Choose your CD term
A CD term refers to how long you will leave your money in the account. Depending on the CD type, you may not have access to your balance during this time -- unless you have a no-penalty CD or you’re OK with paying the withdrawal penalty. But in general, the longer the CD term, the longer you’ll want to leave that money in the account. That’s why experts say CDs can be great as a supplement to an emergency fund that you keep in a more liquid high-yield savings account. That way, you’ll have access to emergency funds if you need them while additional savings sit in a CD until maturity.
When choosing your term, you’ll also want to consider your goals. For instance, are you saving to buy a car in two years or for a vacation you plan to book in six months? If you’re using a CD as part of a savings strategy for a specific upcoming purchase, it’s best to choose a timeline that aligns with your goal for the funds. If you choose a five-year term, but that family vacation is next year, you’ll face a penalty for early withdrawal when the time comes to book a flight. In that case, you’d be better off going with a six-month or one-year term. On the other hand, if you’re looking to lock in a good rate on a CD to save money for your kid’s college tuition in 10 years, a five-year CD term could be exactly what you want.
3. Select a bank or credit union
When you’ve narrowed your CD type and term, it’s time to start shopping for the best CD rates and account features. Here are some things to look for when shopping for a CD.
Online vs. in-person banking
Banks and credit unions change their rates on CDs partly in response to changes in the Federal Reserve’s rate, and they also compete with one another to offer competitive rates. Online banks tend to offer higher annual percentage yields and lower fees than brick-and-mortar banks because they have fewer overhead expenses. But you’ll need to be comfortable fully managing your account online.
“If you’re someone who prefers digital-only interactions, then online banks are great,” said Billy Cho, a savings expert and Manhattan market leader at Citi. “But if you’re someone who doesn’t want to be bound to one way of banking, then choosing an institution that offers both online and hybrid CDs may be a better fit.”
FDIC insurance
To protect your money, it’s best to stick to FDIC- or NCUA-insured banks to protect your funds up to $250,000 per person, per account in case of a bank failure. Usually, you’ll see the FDIC or NCUA logo on the app, website or in the physical branch. Our list of the best CD rates only includes rates from banks that have this insurance for its customers, and experts advise taking a pass on any bank or institution that doesn’t offer it.
“With the recent bank uncertainties, FDIC and NCUA insurance is crucial for consumers,” said Jamilah McCluney, a fiduciary and financial advisor for Black Wealth Financial. “The fear of loss is lessened with the guarantee they offer, and purchasers can feel safe with certainty that their funds are protected up to a certain amount.”
Fees and features
Aside from insurance and choosing the best rate, choose a bank that meets your financial needs. “Always look for a bank that offers the level of flexibility you need,” Cho said. “If you think you might need to withdraw money at some point before the term limit is up, you should prioritize picking a bank that offers no penalty CDs.”
You may choose a bank with branch access to set up your account in person. Or you may choose one because it has fewer fees. Be sure to pay attention to any minimum requirements, fees and other limitations that may make it difficult to manage the account, McCluney said.
4. Apply for a CD
Once you select a bank, it’s time to apply. To open a CD account, you need the following:
- Photo ID
- Name, phone number, address and email
- Social Security number and date of birth
- Your initial, and in most cases, one-time deposit
Depending on the bank, you can apply online, over the phone or in person at a branch. While online and phone applications are convenient and easy, some banks and credit unions may require you to visit a branch to open a CD account.
5. Pay the deposit
You’ll need a one-time deposit to earn interest when you open a CD account. Some banks require a minimum deposit to open an account, and others will close your account if it sits unfunded for a certain time.
How you’ll be able to fund your account will depend on the bank. Most allow you to transfer money from an external bank account, mail a check or direct deposit. If you opened your CD account at your current bank, it may be as simple as transferring funds from your checking or savings account.
The bottom line
Opening a CD can be an effective way to earn interest on cash you don’t plan to touch for a while. It’s also an opportunity to supplement an existing emergency savings account.
But there is a shortlist of things to consider before opening an account with your local branch or an online bank. Understanding your financial goals before opening a CD can make it easier to decide the type of account you should get. Also, consider the features you would like to take advantage of, such as higher APYs or no-penalty withdrawals. You should also consider any potential fees before settling on the right fit for your savings goals.
Correction: An earlier version of this article was assisted by an AI engine and it mischaracterized some aspects of CDs. Those points were all corrected. This version has been substantially updated by a staff writer.
