How to Choose the Best CD for You (2024)

If you have money you’ve earmarked for a coming expense such as a new car or college tuition, a certificate of deposit is a great way to earn interest until you need the cash.

CDs—sometimes just called “certificates” or, in the case of credit unions, “share certificates”—fill a space between conventional bank accounts and conservative investments such as bonds. With a CD, you essentially loan money to a bank or credit union for a set period. In exchange, the bank gives you a fixed return on your deposit.

For years, CDs paid next to nothing and fell out of favor. In fact, people well into their 30s and even 40s, probably paid CDs little mind until recently. With interest rates rising over the past couple of years, however, savers have given these products a fresh look—or in the case of Millennials and Gen Z, a first look.

“People who have been investing for a long time remember when 5% was more common,” says Kathy Carey, director of private wealth research at financial services firm Baird. “People are getting some really good rates right now, better than we’ve seen in a long time.”

You can buy CDs at traditional bricks-and-mortar banks, digital banks and credit unions. In our experience, digital banks and credit unions tend to offer better CD rates than traditional banks, especially bigger banks.

What is a CD?

CDs share some features with savings accounts but are quite different in other ways.

You get a guaranteed rate of return, often at a higher yield than you could earn with a savings account, and the security of deposit insurance. The trade-off is that you agree not to withdraw the money until the CD matures after a predetermined duration, ranging from a few months to five years or longer. Banks use the money they get from CDs to do things like make loans, so they impose early-withdrawal penalties to discourage savers from taking that money back out before maturity.

At maturity, you have the option of rolling the funds into a new CD or withdrawing your principal along with interest earned.

How to choose a CD

Choosing the best CD for your needs is a little more complicated than choosing a high-yield savings account, because there are a few more moving parts to consider when you evaluate CDs. You need to take into account the yield, the maturity term, any fees or other penalties, along with making sure your money will be protected by government deposit insurance.

Look for high yields

A CD’s APY, or annual percentage yield, is likely going to be the first feature you consider. The best CD rates you can get are now in the neighborhood of 5.5%—enough to easily top the current rate of inflation.

Traditional CDs have fixed rates of return, unlike the variable rates that characterize high-yield savings and money-market accounts. Historically, longer-dated CDs have offered higher returns because banks have had to compensate people more generously in return to hanging onto their money for longer. But this isn’t the case right now.

Some banks offer what they call “bump” or “bump up” CDs, which give you an opportunity to increase the APY once or more during the term. These CDs can be useful in an environment where interest rates are rising, since your money won’t be locked into a lower rate for the entire duration of the term.

Another variation on fixed-term CDs is what banks often call a “flex” or “flex index” CD. This CD has a variable rate, similar to a high-yield savings account, although likely with a higher rate of interest. The rates on CDs are pegged to a metric such as the prime rate or a U.S. Treasury security yield, which means the APY could fall if interest rates decline before the CD matures.

Make sure to check if a CD is a callable CD. This means the financial institution can end your term early—likely if rates drop significantly—so you won’t get the amount you’d planned to receive.

Decide what term you want

Unlike a high-yield savings account that lets you deposit and withdraw money with few limitations, a CD has a set maturity term during which you agree to lock up your money. This means that in addition to an eye-catching yield, you’ll also want to make sure that your choice of CD has a maturity date that lines up with when you expect to need the money.

For instance, if you have a expense coming up in a little over a year, a one-year CD gives you an opportunity to earmark those funds—and avoid the temptation of spending that cash on something else—while earning interest.

Often, banks’ and credit unions’ best CD rates will be on promotional CDs that have odd-numbered or offbeat maturity terms, such as seven months rather than six, or 14 months instead of one year. These oddball maturities can be a boon for yield seekers, but the terms make it difficult to integrate these CDs into a CD ladder, which is a strategy of buying CDs with maturities at regular intervals, such as quarterly or annually.

Odd terms, especially if you have several CDs, can also be harder to keep track of, says Kathleen Grace, CEO of wealth-management firm Fiduciary Family Office in Boca Raton, Fla. Miss a rollover window and you could be stuck with a much less-desirable yield, she says.

“Typically, they’re rolled over at a much lower rate, not at that same teaser rate, [so] obviously, calendering these things is important,” Grace says.

Consider costs and convenience

While more banks offer CDs with minimal or even no minimum balances, many banks offer CDs starting with investments of $500 or $1,000. Some offer “jumbo” CD rates that may be higher but require a minimum of $50,000 or $100,000.

Banks dissuade people from “breaking” CDs—that is, closing them out and taking their money back before maturity—by charging early-withdrawal penalties. These penalties are generally a portion of the interest you would have earned if you kept the CD until maturity, from a few months’ worth to a year, or even the entirety of your interest earnings.

“The key is knowing what’s going to happen there. Potentially, you could get zero of that interest,” Carey says, adding that finding out these details probably entails combing through some fine print. ”It can really vary from issuer to issuer, and that’s not going to be clear when you pull up a list of yields.”

If you’re unsure about whether or not you’ll need the money before your CD matures, options include putting it in a high-yield savings account instead, or opening a CD at one of the banks that offers no-penalty CDs. As the name suggests, no-penalty CDs let you take money out of your CD before the term is up. The main drawback is having to settle for a lower APY in return for the flexibility. Some banks also make you close out the entire CD if you want to make a withdrawal, so you could be losing out on potential earnings for the rest of those funds.

When shopping for CDs, also consider how you prefer to bank. Many of the best CD rates come from digital banks, which means you have to be comfortable conducting your banking online rather than walking into a branch to conduct a transaction.

Check insurance coverage

While it’s rare for banks to fail, they sometimes do. In that case, you want to make sure your money is protected by the Federal Deposit Insurance Corp., or FDIC, the government agency that steps in and backstops consumer deposits when a bank fails. A parallel agency, the National Credit Union Administration, or NCUA, performs the same functions for deposits held at credit unions.

FDIC insurance covers up to $250,000 per bank, per depositor and per “ownership category.” Ownership categories include different account types such as individual and joint accounts, some trust accounts, corporate accounts and government accounts, as well as certain benefit and retirement accounts.

If you’re opening an account at an online bank or with a new bank whose name you don’t recognize, find out the name of that bank’s parent company. Some digital banks are brands of established bricks-and-mortar banks; in this case, make sure that any deposits you have with the parent institution as well as the subbrand combined don’t go over the deposit insurance limit.

Most banks and credit unions put their FDIC or NCUA membership information on their websites, but you can also check the FDIC or NCUA agency websites to double-check.

Got a money question? Let Buy Side find the answer. Email [emailprotected].

Include your full name and location, and we may publish a response.