How to select a CD that's right for your needs

Selecting and investing in a certificate of deposit (CD) used to be pretty straightforward: You researched the interest rates at a few banks, compared rates and terms, and then picked the best option.

However, given the current competitive interest rate environment, picking the right CD now requires some strategy. As of January 2024, the current national average on U.S. savings accounts, including high-yield savings, is 0.47%, while the average one-year CD yields 1.86%, according to the FDIC.

Understanding how to make informed decisions about CDs when rates are low will better position you when rates begin to rise. Here's everything you need to know about CDs, how they work, and how to tell if they're the right product for your savings goals.

A certificate of deposit is a type of savings account where you deposit a lump sum that can grow by earning interest for a set period of time. Interest rates for CDs are typically higher than rates on traditional or high-yield savings accounts — but in exchange for that higher rate, you agree not to withdraw money from the account for the specified term — commonly 6, 12, 24, 36, 48, 60, and even 120 months. Typically, the longer the term, the higher the rate.

With most CDs, if you withdraw funds from the account before the term ends, you will have to pay an early-withdrawal penalty. The calculation for the penalty is often based on the amount of the CD’s daily interest. Larger CDs may charge a higher fee for early withdrawals.

CDs can be beneficial for savings goals because their fixed rates mean you'll receive a guaranteed return by the end of the term. And even if rates begin to fall, you'll be locked into earning the same rate as when you opened the account.

When the CD’s term ends, you have the opportunity to decide to cash out your savings and all the interest earned for other endeavors, add to the account, or renew as is. Keep in mind, if you do not act in the specified window, many banks will roll the accumulated principal and interest into a new CD with the same term as the first one.

CDs are typically best for funds that you will likely not need to access for a period of time. Money meant for an upcoming purchase or emergency fund may be better positioned in a more liquid account, such as a high-yield savings account, where there is no time committment for when you can remove your funds.

For longer-term savings, CDs may provide a safe option that offers a higher rate than most other savings products. And because the rate is fixed, you'll know exactly how much you'll earn on your savings by the time the term ends. You can use the help of a CD calculator to determine what your ending balance will be based on your deposit amount, interest rate, term, and other current financial circumstances.

And keep in mind, you're not restricted to opening and funding just one certificate of deposit; you can have several CDs at the same time for different goals. In fact, one savings strategy, called CD laddering, recommends opening multiple accounts with varying maturity dates. This allows you to capture the higher rates of longer-term vehicles, while keeping portions of your money in shorter-term accounts, so not all assets are locked up for longer periods of time.

Learn more about diversifying your savings here.

Because the thought of not being able to access your money for a set time — without paying a fee — may be concerning to some, there are CDs that offer a no-penalty option, which may give you more flexibility. But as with most things, there's a give and take.

A traditional CD and a no-penalty CD work in the same manner, but the major difference is that with a no-penalty CD, you can withdraw funds before the end of its term without incurring a penalty — just as the name implies.

Here are some pros and cons for both accounts:

Pros of a traditional CD

• Generally offers various terms and minimum deposit amounts to fit your needs.

• Tends to offer higher interest rates than no-penalty CDs and many other savings vehicles.

• You can lock in a competitive fixed rate, so you know how much you'll earn at the end of the term.

Cons of a traditional CD

• You won't be able to access any of the funds before the maturity date without incurring a fee.

• If CD rates increase, you'll be locked into earning a lower rate.

• Penalties for cashing out before the term ends can be quite high. You could expect to forfeit around 90 to 180 days' worth of interest, depending on the term.

Pros of a no-penalty CD

• Avoiding an early-withdrawal penalty may provide peace of mind that you can remove your money for any reason without a fee.

• If interest rates rise, you can withdraw your funds and reinvest them in a new CD at a higher rate, without penalty.

• Interest rates for no-penalty CDs are typically higher than traditional savings and even high-yield savings accounts.

Cons of a no-penalty CD

• You may not be able to make partial withdrawals. If you need to remove money early from a CD, the bank may require you to take out all of your cash and close the account.

• They tend to offer lower interest rates than traditional CDs.

When it comes to CDs, not all are created equal. Financial institutions offer CDs in all shapes and sizes — and, of course, with varying rates.

Before deciding on a CD account (or multiple accounts) to open, it's smart to do a bit of research.

Consider your savings goals and deposit amounts: First, consider how much money you'd like to set aside for your CD. Some institutions don't have minimum deposit amounts, while others may require a few thousand. For most CDs, you won't be able to make additional deposits after funding, so coming up with your number ahead of time can help narrow down your search.

If you think there's a chance you might need this money for an emergency or that rates may begin to rise, then a no-penalty CD may be right for you. However, if you're pretty positive you can do without these funds and prefer to make the most of your money by taking advantage of higher interest rates, then a traditional CD may make sense.

Determine your timeline: Next, think about timing. If you have a specific need for when you'll require this money down the road, you can look for CD terms that fit within that timeline.

You might also consider reviewing average CD interest rate trends. Remember, CD rates are fixed — if the interest rates being offered seem low compared to historical averages, shorter-term CDs may be a good choice, so you are not locked into a low rate. However, if rates are high, longer-term CDs may be a better bet because you can secure higher rates for several years.

Shop for great rates: Once your savings amount and timeline are nailed down, you can begin shopping around for interest rates. A good deal is typically a rate that is higher than the current national average. Keep in mind, you'll want to compare apples to apples; if you're looking to open a three-year term CD, make sure all interest rates you review are for that specific timeframe.

You can review CDs locally or online at banks, credit unions, and other financial institutions. Online banks tend to offer better rates than traditional banks because they do not have the same expenses as brick-and-mortar branches and can pass the savings on to you. Credit unions may also offer great rates, but unlike banks, which are open to anyone, credit unions require a membership, based on qualifying guidelines, such as an employer, church, or community group, before you can access their financial offerings.

As you review your options, be sure your money will be protected by looking for an institution that offers FDIC insurance on their deposit accounts. FDIC insurance protects against bank failure or closure up to $250,000 per depositor, per insured bank, for each deposit account ownership category.

Review penalties and fees: Finally, you'll want to investigate the financial institution’s early withdrawal penalties and fees.

Researching a CD's early-withdrawal penalties may be harder than checking other bank fees because these penalties are usually expressed in terms of interest the CD earned (or would have earned) over a number of days rather than a fixed dollar amount or percentage.

For example, the bank might state the penalty for early withdrawal is 60 days of interest. This penalty may differ by bank and even by the term of a CD at the same bank; a five-year CD may have a higher penalty than a one-year CD.

Even if you plan on opening a no-penalty CD, be sure to read the fine print to learn about the withdrawal rules and turnaround times.

Note: During the Covid-19 pandemic and resulting financial crisis, many banks and credit unions temporarily waived early-withdrawal penalties for CDs. To learn if your banking institution waived these fees on an existing account, contact its customer service line.

We get it, researching a variety of CDs with different banks, credit unions, and financial institutions can be time-consuming and frustrating. There are countless savings products out there, and they all tend to claim they offer the best deal around.

What's worse is every time you open a new bank account, it's another lengthy process of filling out information, setting up an account, creating new logins, and remembering additional passwords.

At Raisin, we resolved all of those issues and made it easier to shop and invest in high-yield, federally insured CDs and other savings accounts. Our savings platform gives you access to an exclusive network of banking institutions and savings products all from one place.

And once you find the savings products you'd like to incorporate into your savings goals, you can manage your cash efficiently from your one, unified account.

For more information on how to open a Raisin account, please visit our website.