How CDs work

Pink piggy bank in safe with businessman in suit, isolated on white background.
NiglayNik / Shutterstock
When you put your money into a CD, you agree to let the bank hold it for a certain period of time.

So, here's the not-so-fine print with CDs: You'll have to agree to let the bank hold on to your money for months or years. That's called the CD's term.

You might choose to stash your money away in six-month, two-year or five-year CDs. Normally, the longer the term, the higher the interest rate.

The potential payout from a long-term CD might be very enticing. Who doesn't want to earn better returns?

But you may have to lock your money away for a loooooooong time.

If some financial emergency comes along and you need to get at your money, tapping your CDs could be costly.

The risks with CDs

Document with title Financial penalty on a desk.
designer491 / Shutterstock
You'll face penalties if you try to withdraw money from your CDs too early.

Yeah, we know — we said at the beginning that CDs were risk-free. That's true in one sense: You can put up to $250,000 in CDs and will never lose that money as long as your account is with a bank insured by FDIC or a credit union insured by NCUA.

But if you go back on your bargain with the institution and need to withdraw your money early, you'll face the risk of penalties. The rules vary, but generally you'll have to give up a chunk of your interest.

For example, if you close out a one-year CD too soon, you could say goodbye to six months' worth of interest. If you've had the CD only two months, the penalty would eat into your original deposit amount. Ouch!

The early withdrawal penalty for a five-year CD might be a full year of interest.

Another risk is that interest rates might rise while you've got your money locked up, and your savings will miss out on the opportunity to earn better returns.

Different flavors of CDs, laddering

Feet of a carpenter  ready for work on a ladder
tommaso79 / Shutterstock
A CD ladder can help you take advantage of rising interest rates.

All of that describes the workings of a traditional CD. There are other varieties that allow you to make withdrawals more easily ("liquid" CDs) or take advantage of rising interest rates ("bump-up" CDs).

To get some of that flexibility, you might have to accept a lower interest rate when you open the account.

But there is a trick that can allow you to grab onto rising rates using just plain-vanilla, regular CDs. It's called laddering.

You divide your investment across staggered CDs so that every year you have CDs that are maturing.

This way, you can enjoy the higher initial interest rates from longer-term CDs, and also have regular opportunities to invest in new CDs at even better rates.

Where to get CDs

Seller showing on line products with a tablet to the customers in a desktop at office
Antonio Guillem / Shutterstock
You can open a CD at your nearest bank or credit union.

Opening a CD can be as simple as visiting your nearest bank or credit union. Smaller, local banks or credit unions will give you better rates than the big national institutions, and online-only banks can offer great deals because of their lower expenses.

Or, if you want to comparison-shop across banks (which you should) you can compare rates online.

Look for a minimum deposit that you can manage, although some banks have CDs with no minimum opening requirements.

You'll want to look for the best rates and find CDs at your sweet spot, with a good yield and a term that's doable. How long will you want to lock away your money?

Putting cash out of reach for years may be tough — but if you've just got some spare change languishing in a low-rate savings account that you never touch, put that money into CDs pronto.

A high-interest savings account can also provide flexibility and competitive rates.

About the Author

Doug Whiteman

Doug Whiteman


Doug Whiteman is the editor-in-chief of MoneyWise. He has been quoted by The Wall Street Journal, USA Today and and has been interviewed on Fox Business, CBS Radio and the syndicated TV show "First Business."

You May Also Like

Take a Break From Your Debt This Month

Let debt consolidation give you a break.

How to Send Money to Someone Without a Bank Account

Your friend needs cash but is "unbanked"? You have plenty of ways to help.

How to Cash a Personal Check

Here's how to get real money from those valuable slips of paper.

How Do You Deposit a Check?

Here’s a guide on how to do it at a bank, credit union, ATM or through an app.