A certificate of deposit (CD) is a different type of savings vehicle that locks your interest rate for a set amount of time. For example, if you open a three-year CD with 1% APY, it will keep that same interest rate for the entire three years, no matter what happens to interest rates overall.
CDs typically offer higher interest rates than high-yield savings accounts — but they work a bit differently. With CDs, you typically make one lump sum deposit, which you agree to leave untouched for the term you select. Once the term is over, you can withdraw the money and the interest you earned without penalty.
CDs offer various terms that usually range from a few months up to five years, with some even extending to 10 years. The longer the term, the higher the interest rate you'll typically earn.
Like HYSAs, most CDs are FDIC-insured up to $250,000 per account. Many CD providers have a minimum amount required to open the account, usually around $500.
There are two main types of CDs available, traditional fixed-term CDs and no-penalty CDs. Here are the differences:
Traditional fixed-term CDs
A traditional, or fixed-term, CD has the same interest rate for the entire term. If you withdraw the funds before the CD has matured, you're typically charged a penalty. The penalty amount depends on how long the CD has been open and how long the initial term is.
Because fixed-term CDs charge a fee if withdrawn early, they tend to be a good choice for long-term savings. For example, if you’re saving money for a vacation in 2022, you can choose a 12-month CD.
People who struggle with saving for goals may prefer a fixed-term CD compared to a HYSA because it’s harder to access the money.
No-penalty CDs
A no-penalty CD does not charge a penalty if you access the funds before the term is over. While this option provides added flexibility, no-penalty CDs usually offer lower interest rates than fixed-term options.
In some ways, a no-penalty CD is similar to an HYSA because there are no downsides to withdrawing the money early. However, while you won't be charged if you want or need to access your funds in a no-penalty CD, with some CDs you may not be allowed to make partial withdrawals, which means you'll have to remove all of your funds at once.
