What is a CD? #CashNews.co

A CD, short for certificate of deposit, is a kind of savings account that earns interest and protects your money. It’s a lot like a savings account, though it often offers higher interest rates — allowing you to maximize your savings with almost zero risk. However, it may not be right for every savings goal since it can limit your ability to access your money for a period of time.

Read below to learn more about how CDs work, and how to decide if opening one is a good idea for you.

When you open a CD, you’ll have to choose how long you plan to keep it open, known as the CD’s term. Once your CD’s term ends, it will have reached its maturity date, which is when you can withdraw your money and the interest you’ve earned, or roll your money into a new CD.

CD terms can range from one month to five years or even longer. CD rates vary by term and are usually fixed for the life of the account. The rates of return on CDs, called the annual percentage yield, or APY, are lowest on very short-term CDs of one to six months. Currently, CD APYs peak at around one year, and then fall slightly out to five years, according to national averages published by the Federal Deposit Insurance Corp.

You should shop around before you open a CD. Rates can vary significantly from one bank to another even for CDs with the same term. As official rates rise and fall, and as market expectations for future rates adjust, financial institutions change the APYs they offer on CDs.

CDs and savings accounts are both good places to save money; however, they are different in important ways. The biggest is that when you open a CD, you’re committing to leaving your money alone for a set period of time. That’s one of the reasons banks and credit unions are willing to offer higher APYs on CDs. You’ll have to pay a penalty if you pull money from a CD early.

You’re making no such commitment with a savings account, and you can withdraw your money whenever you need it.

Other main differences:

• You can add money to a savings account at any time, but not with a CD.

• A CD’s APY is fixed for the length of its term, while the APY on a savings account can change.

• CDs require a substantial minimum deposit. While savings accounts may have minimum deposit requirements, they are much lower, usually between $25 and $100.

Go deeper: High-yield savings account vs. CD: Which is right for you?

A regular, or traditional, CD will have a fixed APY, pay interest compounded daily or monthly, and charge an early withdrawal penalty when you take money out before the maturity date. It’s a good way to save if you’re sure you won’t need the money before the term expires.

A no-penalty CD has a fixed APY, pays compounded interest, and does not charge a penalty if you withdraw money before the maturity date. In exchange for the flexibility, you will usually get a lower interest rate with a no-penalty CD.

A bump-up CD lets you raise the APY rate during its term if interest rates at the financial institution where you have your account rise. The initial APY on a bump-up CD is likely to be lower than the rate for a regular CD. There will be limits on how often you can ask for a rate increase.

Go deeper: How to save with CDs.

CDs are insured by the Federal Deposit Insurance Corp., the same entity that insures savings and checking accounts. If you have a CD with a credit union, called a share certificate, it will be insured by the National Credit Union Administration. Your deposits are insured up to $250,000 per account, per depositor.

You can open a CD at an online bank, a local or national bank, a credit union, or a neobank. You do not have to open a CD at the same bank or credit union where you already have a savings or checking account.

The ideal term length depends on your personal needs and preferences. For example, if you have a lump sum that you’re planning to use as a down payment on a house, you can open a CD that will expire shortly before you’re ready to apply for a mortgage.

If you have a sum of money you know you won’t need right away, putting it in a CD can help you earn more interest than if you kept it in a savings account.

When a CD matures, the bank or credit union will give you a grace period of several days. You’ll need to decide whether to take your money out or roll it over into a new CD. In most cases, if you do nothing your CD will automatically renew.