Certificates of deposit (CDs) are widely available and easy to buy. You can open a CD online or at almost any bank or credit union in these five key steps. Learn more about the process and what factors to weigh in choosing among different options.
Key Takeaways
- Opening a certificate of deposit (CD) with a bank or credit union can be quick and easy.
- Decide on the CD type and terms before you commit your money.
- Rates vary widely from one bank to another.
- Almost all banks and credit unions are covered by federal deposit insurance.
1. Choose a Type and Term
A CD is considered a low-risk investment choice that can help you grow your money. But not all CDs are the same. Your own financial goals and current situation will play a role in which type of CD and which term length may be right for you.
- Type of CD: A standard CD has penalties for early withdrawal, whereas liquid CDs (a rarer type) don't. There are also differences in the way that interest is computed, as well as when you will receive your interest. You can read more about the various types in our CD Guide.
- Length of CD: CDs can have terms that run from as little as a few months to 10 years or more. The longer you are willing to leave your money in a CD, the higher the interest rate is. Early withdrawal penalties could wipe out any return on your investment.
- Single or joint account: You can open a CD as a joint account as with other bank accounts. Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) insurance covers up to $250,000 per person per institution. The combined coverage for a joint account is $500,000.
2. Pick a Provider
Banks or credit unions are common choices, and you have plenty of options. Investopedia's regularly updated list of Best Bank CD Rates is based on 200 financial institutions that sell CDs. Consider these factors when choosing a financial institution:
- Insurance coverage: Most U.S. bank account deposits, including CDs, are insured by the FDIC. Credit union deposits are insured through the NCUA. Make sure the institution you select is covered by one or the other.
- Interest rates: Shop around for the best interest rate. The top-paying CDs nationwide can pay three to five times the national average, so comparison shopping is well worth the effort.
- Early withdrawal penalties: If you access your money early, you will pay a penalty. Choosing a CD with low early-withdrawal penalties could save you money, or buy a CD with a shorter term. You can always roll it over into a new CD when it expires.
Consider splitting your money among several CDs with different maturities. The longer-term CDs will earn a higher interest rate, while the shorter-term CDs will be more readily available in case of need.
3. Complete the Application
The process of opening a CD is straightforward. With many banks and credit unions, you can do it entirely online. You'll be asked for basic information like your address and contact details. You may have to show an ID if you don't already have an account at that financial institution.
4. Indicate How to Receive Your Interest
Investors must decide how to receive interest.Many financial institutions offer two options. You can collect all interest at the end of a CD's term or receive it in periodic disbursem*nts, such as monthly or annually. If you want to maximize your total interest, opt to receive it at the end. If you'd prefer a regular cash flow from your CD, arrange for disbursem*nts.
5. Fund the CD
You'll need to fund the CD only once. Unlike savings accounts, CDs generally don't allow you to make additional deposits. You can fund your CD with an online or phone transfer from another account or by mailing a check. At the end of your CD's term, you can withdrawal your money or invest it in a new CD.
Frequently Asked Questions (FAQs)
Is a CD Right for Me?
Certificates of deposit are useful in different situations. A CD with an appropriate term is a way to earn a little more interest on cash while keeping it safe. CDs also are a good choice for risk-averse investors who don't want to take a chance on more volatile investments such as stocks.
What Is the Difference Between a CD and a Savings Account?
CDs and savings accounts help investors save money for a savings goal like a down payment on a house while earning a guaranteedreturn. However, savings accounts allow you to make additional deposits and up to six monthly withdrawals. CDs require an initial deposit that is held until the maturity date, which can vary from six months to five years. CDs generally pay higher interest rates than savings accounts because the owner cannot easily withdraw the money.
Which CD Term Should I Choose?
That depends on how soon you need to get your money back. If you are saving for a specific goal or project, the expected start of that project can help you determine your maximum CD term. On the other hand, if you're saving cash, you might opt for a longer-term CD to maximize your interest rate.
The Bottom Line
Opening a certificate of deposit (CD) is easy, and choices are plentiful. Because interest rates vary widely from one financial institution to another, it pays to shop around. Investors should understand the type of CD you want and for how long you are comfortable having your money tied up in it.
For more guidance on whether a CD is right for your portfolio, consider consulting a professional financial advisor.
FAQs
Certificate of Deposit (CD) A certifiicate issued by a bank to a person deoposititng money for a specified length of time. Higher Rate then Regular Savings. Invest. Expend money with the expectation of achieving a profit or material result by putting it into financial schemes.
What is a certificate of deposit or CD quizlet? ›
Certificate of Deposit (CD) A certifiicate issued by a bank to a person deoposititng money for a specified length of time. Higher Rate then Regular Savings. Invest. Expend money with the expectation of achieving a profit or material result by putting it into financial schemes.
What questions to ask when opening a CD? ›
8 important questions to ask when opening a CD
- What is the interest rate? ...
- What is the term length? ...
- Are there any penalties for early withdrawal? ...
- What is the minimum deposit requirement? ...
- Can the interest rate change during the term? ...
- Is the CD insured? ...
- What is the renewal process?
A certificate of deposit, or CD, is a type of savings account offered by banks and credit unions. You generally agree to keep your money in the CD without taking a withdrawal for a specified length of time. Withdrawing money early means paying a penalty fee to the bank.
How much money does it take to open a CD certificate of deposit )? ›
Minimum deposits vary based on account and financial institution, but a required deposit of around $500 to $1,000 is typical when opening a CD. However, it is possible to find CDs with no minimum deposit requirement. Jumbo CDs are like regular CDs but require much larger minimum deposits.
What do certificates of deposit or CDs have __________________? ›
A CD, or certificate of deposit, is a type of savings account with a fixed interest rate that's usually higher than the rate for a regular savings account. A CD also has a fixed term length and a fixed withdrawal date, known as the maturity date.
What is a great reason to open a certificate of deposit CD )? ›
CDs are appealing for many reasons: they're relatively safe investments, offer stellar APYs, and come in a variety of different term lengths.
What do I need to open a CD? ›
Unless you already have one, you'll need to create a new account with the issuing bank to open a CD account. You may have to share personal information such as your name, address, contact info, and tax identification number (such as a Social Security number). Fund the CD.
What do you need to know about CDs? ›
Certificates of deposit (CDs) generally pay higher interest rates than savings and money market accounts. CDs are a safer and more conservative investment than stocks and bonds, but offer lower opportunity for growth. You can find CDs at banks, credit unions, and brokerages.
What are the risks of certificate of deposit CD? ›
The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.
What do I need to open a CDS account? You need two recently taken passport size photographs, original National ID or passport. In the case of a company you need the original certificate of incorporation, and if you are an organization registered in any other way you need the certificate of registration.
Why might a person choose to open a certificate of deposit (CD)? ›
CDs typically offer higher returns than savings accounts
Since CDs typically offer higher interest rates than traditional savings accounts, depositing some of those funds into a CD can help your hard-earned savings keep their value, though in high inflation, CD rates can also fall behind.
What is the maximum you can put in a CD? ›
Use Multiple CDs for Your Significant Savings
Breaking the funds up and putting money into CDs at different banks can help you insure your CDs beyond the $250,000 limit available at just one bank. But always speak with a bank representative before opening a CD to confirm the bank is FDIC-insured.
What is a CD certificate of deposit and how is it different from a savings account? ›
Certificate of deposit (CD)
A certificate of deposit offers a fixed interest rate that's usually higher than what a regular savings account offers. The tradeoff is you agree to keep your money in the CD for a set amount of time, typically three months to five years.
What is the main disadvantage of a certificate of deposit CD )? ›
Early withdrawal penalty
One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises.
What is the major difference between a certificate of deposit CD and a money market account MMA? ›
Money market accounts (MMAs) and certificates of deposit (CDs) are types of federally insured savings accounts that earn interest. But their rates and ease of access differ. CDs tend to have higher rates than money market accounts and give no access to your money until a term ends.
