WHAT IS A CD ACCOUNT: How it Works & Best Accounts

what is a cd account

When interest rates rise, you may want to earn a competitive return on your savings. You might put that money in a checking or savings account, but another option is to open a certificate of deposit (or CD), which is a form of savings account that provides high returns with low risk. Generally, a CD offers a more competitive interest rate than a standard savings account and lets you grow your money risk-free. But what is a CD account? How do CDs work? And how do you compare CD rates? This article offers a primer on CD accounts, including how to invest in CDs and what CD rates are all about. You will also get to see a work example and how a CD account vs a savings account differs. 

What is a CD?

A CD, or certificate of deposit, is a form of savings account that typically has a greater interest rate than a conventional savings account. It also has a set term duration and a set withdrawal date, known as the maturity date. A CD locks funds in for a period ranging from three months to five years. Although there are no monthly costs with CDs, most carry an early withdrawal penalty.

Certificates of deposit, like conventional savings accounts, are insured, so you get your money back if your bank fails. The Federal Deposit Insurance Corporation insures bank CDs.

How Do CD Accounts Work?

In exchange for putting your money in a bank for a set length of time (commonly referred to as the term or duration), the bank will give you a fixed interest rate that is normally greater than the rates offered on savings accounts. When the term expires (or the CD matures), you receive the money you deposited (the principal) plus any interest earned.

If you need to access your funds before the period of the CD expires, you may be charged an early withdrawal penalty, which can drastically reduce the income you earned on the CD.

Types of Specialty CD Accounts

You have options with CD accounts! The type of CD you choose is determined by your financial goals and needs. When you need to access that money and how much you want to earn by depositing it into a CD are two questions to ask yourself.

#1. Jumbo CDs

To open a Jumbo CD, you’ll need a much bigger minimum deposit, such as $100,000. In exchange, interest rates are much higher. The trade-off is that you’re pledging to lock in a large sum of money. In addition to having the funds to start a Jumbo CD, you’ll want to ensure that you can commit to the CD term. Otherwise, you’ll face an early withdrawal penalty.

#2. Add-On CDs

An Add-On CD allows you to add monies to your CD at any time. You can earn more interest over the life of your CD than if you deposited a single lump payment upfront.

#3. IRA CDs

An IRA CD is a type of individual retirement account that contains certificates of deposit. These can be Roth or Traditional IRAs. An IRA CD, like an IRA, provides tax advantages.

#4. Bump-Up CDs

A Bump-Up CD is a product that allows a CD holder to request that their existing interest rate be “bumped up” to the bank’s new CD rate. With Synchrony Bank’s Bump-Up CD, you can increase your interest rate once throughout the term and benefit from a bigger return, offering you the most flexibility. However, “bumping” is only available if the product’s rate rises during the period.

Certificate of Deposits: Pros and Cons

Before you invest in this savings vehicle, consider the following benefits and drawbacks:

Benefits of CD accounts

  • Safe. A CD is one of the most secure savings instruments available. In contrast to the stock market or variable-rate savings accounts, the interest rate on a CD is fixed and guaranteed, allowing you to increase your funds without risk. Each CD account, like all other deposit accounts, is FDIC-insured.
  • Predictable. Because CDs offer fixed and guaranteed interest rates, you can determine exactly how much money you’ll earn during the life of the CD. CD periods might range from 3 months to 5 years, depending on your needs.
  • The interest rate is competitive. CDs often offer higher interest rates than other FDIC-insured products such as savings, checking, and money market accounts.
  • CDs of several sorts. You can select the type of CD you want. Some banks provide specialized CDs, which we’ll discuss further below.

What are the Disadvantages of a CD?

  • Early withdrawals may result in penalties. If you continue with your CD until it matures, you’ll get the greatest bang for your buck. Otherwise, an early withdrawal often results in a penalty. Cashing out a one-year CD, for example, may entail paying 90 days of basic interest. A longer-term CD may have a higher penalty.
  • Higher earnings may be lost. If you keep too much money in a single CD, you may miss out on other financial products and accounts with greater interest rates. However, one option is to use a Bump-Up CD, which is a savings product that allows CD holders to request that their current fixed interest rate be “bumped up” to the current interest rate.
  • Not designed for certain financial goals: While CDs offer reasonable interest rates, they are often insufficient to meet long-term financial goals such as retirement savings. It’s also not the best place to keep your emergency cash, as you may need to dip into it unexpectedly to cover expenses.

CD Account VS Savings Account

A CD account differs from a savings account in various respects, including:

  • A CD account tends to have higher rates vs a regular savings account. The interest rate is higher in exchange for not having access to the money during the duration of a CD account. CDs can be an appealing investment due to their minimal risk and high rates when compared to other bank accounts. However, if you want the flexibility of increasing cash over time or taking advantage of better rates, look into the best high-yield savings accounts.
  • Savings account rates fluctuate over time; CD rates remain constant after you start a CD (with the unusual exception of a step-up or bump-up CD; This can be advantageous: CDs have guaranteed returns, and if you open a CD when interest rates are high, you can continue to benefit from that rate even if banks lower rates on savings accounts and new CDs.
  • Savings accounts allow you to access your money on a regular basis, but CDs do not. You can deposit and withdraw from a savings account quite freely, but you can only withdraw from most CDs penalty-free for a few days after the term finishes. (The sole exception is a no-penalty CD; read on for more information.)

How is CD Account Interest Rate Determined?

The financial institution, benchmark interest rates, and the kind of CD account all influence the CD rate.

  • Benchmark interest rates. To get down to business, financial institutions often look to the United States Federal Reserve to establish interest rates. When the federal funds rate rises, the interest rate on savings and CD accounts often rises as well. When the federal funds rate declines, so do the rates on savings and CD accounts.
  • The financial establishment. Online banking companies, such as Synchrony Bank, typically provide more attractive CD rates than their physical counterparts.
  • Types of CDs. The interest rate of a CD account can also be determined using the various types of CDs in use.

What Happens When a CD Matures?

When a CD matures, or expires, there is a one-week grace period during which you can withdraw funds. After that period, many CDs will automatically renew for the same or comparable length as before, although the rate will most likely be based on the rate for new CDs of that term, rather than your CD’s original pricing. Withdrawals made before the next maturity date incur a penalty. Learn more about your CD maturation options.

How Do I Know if a CD is Right for Me?

A CD has several advantages, but it is critical to understand all of the facts and conditions before signing on the signed line. If you have unused funds set aside for a specific financial objective, like purchasing a home, financing a loved one’s education, or saving for an emergency fund or retirement, you should consider obtaining a CD. You could benefit from:

  • Low risk: A CD allows you to experiment with new financial instruments while keeping a portion of your money safe and collecting interest.
  • Potential reward: If you have unused cash from a larger project, investing in a CD can provide a return on your investment.

However, keep in mind that any withdrawals made before the maturity date would almost certainly result in costs, and monies cannot be added to a CD throughout its term. If you desire the flexibility of having fast access to your cash in an emergency, you should consider a shorter-term, money market, or checking account.

Best CD Account Rates From Top Banks

To ensure a financially secure decision, read the expert advice and guidelines below before opening a certificate of deposit. Here are our top selections for the highest CD account rates at banks:

#1. Bread Savings

Bread Savings is an online bank that was previously known as Comenity Direct. This Bread Savings provides five CD periods. They range from one year to five years.

#2. Marcus by Goldman Sachs

Marcus by Goldman Sachs has a competitive CD yield. It provides a wide range of CD terminology and CD formats. Its standard CD periods range from six months to six years.It offers three no-penalty CDs and a rate-bump CD in addition to its nine conventional CD durations.

#3. Capital One

Capital One offers CDs with durations ranging from six months to five years. There is no minimum opening deposit for these CDs. The bank provides competitive returns and has no minimum balance requirement.

#4. Synchrony Bank

Synchrony Bank offers a variety of conventional CDs with terms ranging from three months to five years. Earlier this year, it also released a no-penalty CD and a bump-up CD. IRA CDs are also available from Synchrony Bank.

#5. Barclays Bank

Barclays is a well-known online bank for its credit cards, but it also provides CDs and an online savings account. This Barclays has nine CD terms ranging from three months to five years.

How Much Does a 10000 CD Make in a Year?

A one-year CD with a $10,000 beginning deposit and a 5% yield would be worth roughly $10,500 when it matures in 12 months. This high-yielding one-year CD would earn you around $332 more in total interest than the national average CD.

What is a CD Account Good for?

A certificate of deposit (CD) is a low-risk savings product that can increase your interest earnings while keeping your money invested in a relatively safe manner. CDs, like savings accounts, are low risk because they are FDIC-insured up to $250,000.

Are CD Accounts Worth it?

Yes. CDs are a safe investment that can provide a higher rate of return than other low-risk accounts. The goal is to ensure that you will not require the funds for an extended length of time.

Which Bank Gives 7% Interest on Savings Accounts?

Banks in the United States do not pay 7% interest, but one credit union, Landmark CU, does, with significant conditions and stipulations.

What is the Highest-Paying CD Today?

For a nine-month term, the highest earning CD (certificate of deposit) gave a 5.50% APY (annual percentage yield).

Is it Better to put Money in a CD or Savings?

CDs may provide higher interest rates than savings accounts. Longer durations are usually associated with lower interest rates. If you choose a fixed CD rate versus an adjustable CD rate, your rates will remain fixed.

How Risky is a CD Account?

While it’s prudent to question whether any investment can or will lose money, CDs are a safe bet for savings thanks to federal insurance of up to $250,000. If you have more than $250,000 in a CD or account combination with an insured institution that collapses, you may lose money in rare situations.

Is a CD Safer than a Savings Account?

CDs, unlike other investments, are regarded as one of the most secure ways to save money. There is no doubt about how well it will perform or how long you will retain it. You will invest a certain amount at a fixed rate for a set period of time.


Investing in a certificate of deposit isn’t the fastest way to grow your money, but it does provide a guaranteed return and security that money in the stock market does not. A good-rate CD can be a crucial part of your entire savings strategy.

You may earn a respectable return on your money while having your investments backed by the federal government if you choose the correct sort of CD, use a CD ladder approach, and avoid withdrawal penalties.


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