What Is a Certificate of Deposit?

If you’ve been setting money aside for a rainy day, chances are you’ve been putting it in a savings account at your bank. It’s easily accessible should you need it, and you’ll probably earn a little interest for having it sit there in the savings account. But did you know there are alternatives to your average savings account that will allow you to earn higher interest rates? Say hello to a little thing called a certificate of deposit (CD), a type of federally insured savings account that usually has a higher interest rate than other savings accounts, but can only be withdrawn after a certain period of time.

A certificate of deposit is almost identical to a savings account — you deposit your savings into it — but unlike a regular savings account, you make an agreement with the bank to leave your money in the account for a certain period of time in exchange for a higher interest rate. The longer you agree to leave your money in the account, the higher the interest rate you earn on it will be. Terms typically run anywhere from three months to 10 years.

However, CDs aren’t necessarily right for every situation. Let’s take a look at what types of CDs are available, who should consider them, and what other options are available if CDs aren’t right for you.

The Benefits of CDs

Higher interest rates

As we touched on above, CDs are a good alternative to traditional savings accounts because they accrue more interest. The rate at which your CD will accrue interest depends on the term length and other factors, but on average, the APY earned on a CD will be much higher than you’ll get on a savings account.

Safer than the stock market

Perhaps you have some money you’d like to invest, but you aren’t wild about stock market risks. CDs are a solid alternative because if you purchase one that’s FDIC-insured, you’re covered no matter what the market does. Your money will continue to grow at a predictable rate as it sits in the account, especially if you opt for a fixed-rate CD, which has a fixed interest rate for the life of the account.

Flexible term options

While you’ll likely earn the most interest on CDs that take years to mature, you don’t have to buy a CD that won’t mature for 10 years. You can purchase much shorter-term CDs, including some that will mature in a handful of months. It all depends on your goals for the investment.

Low or no fees

One of the nice things about investing in CDs is there aren’t usually any associated fees, or if there are, they’re usually pretty low. That’s quite different than your average savings or checking account, which can come with all sorts of extra charges, including monthly maintenance fees. No fees means you won’t have to worry about extra charges cutting down on the interest you earn on your money. There is one caveat, though: if you withdraw your money prior to the date you agreed to, you’ll be hit with an early withdrawal penalty. So if you want to invest in CDs for the lack of fees or other monthly charges, make sure you keep that in mind.

What Types of CDs Are Available?

Fixed rate CDs

This is the most common type of CD. It has a set interest rate that will be paid for the life of the CD, so if you purchase a 10-year CD with a 2.66 percent annual percentage yield, or APY, you’ll earn 2.66 percent per year for that entire 10 years, whether or not the Federal Reserve adjusts interest rates. If you go this route, make sure you’re educated on what changes could be coming for the fed rate or you may lock in a rate that could be higher had you waited.

Variable rate CDs

A variable rate CD is pretty much what it sounds like: it’s a CD with a percentage rate that fluctuates according to the terms of your agreement. It may be a five-year CD that starts with a lower interest rate that increases over time, or it could be based on other factors.

Adjustable rate CDs

An adjustable rate CD isn’t the same as a variable rate CD, although it sounds like the two could be interchangeable. An adjustable rate CD actually has a set interest rate at the time of your deposit, but it gives you the option to “adjust” the rate during the term of your CD.

Bump-up CDs

A bump-up CD is a CD that gives you the option to request a higher rate. This is handy in cases where your bank has increased the APY they’re offering and you want to take advantage of that higher rate. The downside is that they often start at lower interest rates than fixed CDs, and you can often only increase the rate one time during the life of your CD. They may also require you to deposit more money up front, but it will all depend on the terms offered by your bank.

Step-up CDs

A step-up CD is a bit like a variable rate or adjustable rate CD, but the APY will be set to go up at regular intervals. This could be every few months, every few years or somewhere in between. Again, it will depend on the terms you agree to, so make sure you’re well-informed before you sign anything.

Liquid CDs

Remember those early withdrawal penalties we mentioned above? Well, there are cases where you can purchase a CD without those penalties. These are called liquid CDs, and while the lack of penalties for early withdrawal may be appealing, you’ll usually have to agree to a lower rate of return than you would with a traditional CD. You’ll also likely be required to carry a minimum balance, but that will depend on your bank and the terms you agree to.

Jumbo CDs

If you have a large chunk of change you’d like to invest in a CD, a jumbo CD might be a good option for you. It’s basically the same as a regular CD with fixed rates, but this kind of CD will earn you higher rates than a traditional one will. You’ll have to invest a significant amount of money to buy it — usually more than $100,000.


If you’re investing in a CD for retirement purposes, an IRA CD may be a good option. This type of CD is a normal certificate of deposit, but it’s held in an individual retirement account, which is a pretty big advantage for tax purposes.

Who Should Consider CDs?

Given the potential for early withdrawal fees or other penalties, CDs are best for people who can set some savings aside for a period of time without needing to make any withdrawals. If you think you may need that money for emergencies or other day-to-day bills, CDs aren’t the best investment for you. They are great long-term options, though, especially if you’re planning for retirement, concerned about leaving your money in a volatile stock market or just want to earn interest at a higher rate.

What Are the Alternatives to CDs?

If CDs aren’t for you, don’t get discouraged; there are still options out there. Maybe one of these alternatives will work better for your situation.

High-interest savings account

If you’re worried about needing to withdraw your money before it matures in a CD, try looking at high-interest savings accounts. There are plenty of options out there, and while they likely won’t earn the high rate a CD will, they’ll still earn more interest than a typical savings account, and you won’t face steep penalties for needing to use your money before an agreed-upon date.

The stock market or dividend stocks

Perhaps you aren’t worried about the mature date on a CD, but you’re interested in earning more money than interest on a CD will. There’s always the option to invest that money into the stock market, though the opportunity for a higher reward is always balanced by the risk of losing some of your investment.


Buying bonds is still a solid choice as an alternative to putting your money in a CD. Bonds are less volatile than the stock market, and typically earn you between three and five percent back on your investment.

Use the money to pay off debt

If you have a ton of debt and some liquid cash lying around, you should consider using the money to pay off those debts before investing or saving that money. If you don’t, you’re going to be accruing interest on your debts at a much faster rate than you’ll be earning interest on a CD, and paying a lot more out in the long run. It’s almost always better to have less debt.