What Is a Certificate of Deposit (CD) Account?

A certificate of deposit (CD) account is a savings account that holds a fixed amount of money for a fixed period, typically at a higher interest rate than regular savings accounts. The issuing bank or credit union pays interest on the deposit until the CD reaches its maturity date.

If you hold your CD until maturity, you’re guaranteed your initial investment plus interest. But if you withdraw before the term ends, a penalty usually applies. CDs are ideal if you want to securely save a lump sum and don’t require immediate access to those funds.

A certificate of deposit (CD) is a contract between you and a bank where you deposit a sum of money for a fixed term, as short as three months or as long as five to ten years in some cases. CD accounts require you to leave your money untouched until the withdrawal date to earn interest. The bank pays you interest on this amount. CD accounts are generally available through banks and credit unions.

A CD account requires you to specify the term and then make an initial deposit. The interest rate available to you will depend on the length of the term and the amount you deposit — generally, higher deposits will yield higher interest rate opportunities.

Some key features of a CD account include:

CD rates are mainly influenced by the Federal Reserve's federal funds rate, which sets a benchmark for interest rates in response to the broader economic environment. The actual CD rates offered to you will vary based on the financial institution, term length, CD type and deposit amount.

There are a variety of CD (certificate of deposit) types available to you, depending on your needs and your investment goals. Banks and credit unions aren’t required to offer every kind, so it’s helpful to understand what you want out of your investment before you start — and to shop around at different banks — to find the right product mixture for you.

Overall, CD (certificate of deposit) accounts are insured investment tools that offer access to higher interest rates than traditional savings accounts. But you lose access to your money until the CD matures, which requires diligence and tight financial planning.

We highlight more of the benefits and drawbacks of CDs below.

When choosing where to place your savings, compare CDs and savings accounts to see which best suits your needs. The best for you will depend on how you want to use the money and how long you feel comfortable leaving it untouched.

Both high-yield savings accounts and certificates of deposit are interest-earning accounts, but they work differently. A high-yield savings account offers a higher interest rate than traditional savings accounts.

High-yield savings accounts offer greater liquidity, but their interest rates are variable. This means the rate can fluctuate at any time, depending on market conditions.

CDs have fixed interest rates that are locked in for a set term. This provides certainty about your earnings but also means that you can't access your money without penalty until the term ends. You also can’t invest the funds elsewhere if better opportunities arise without losing money.

Both CDs and money market accounts (MMAs) usually offer higher interest rates than traditional savings accounts. MMAs allow up to six transactions per year and have variable rates, whereas CDs require you to wait for the term to mature before accessing your deposit to avoid penalties.

We answered some of your commonly asked questions about CD (certificate of deposit) accounts.