A certificate of deposit (or CD) is considered a type of savings account, but a CD locks up your money for a fixed time period in exchange for a higher rate of interest than a standard savings account.
While a savings account allows you to access your cash at any time, you typically purchase a CD for a set period of time during which you can’t withdraw the funds without paying a penalty. Typical CD terms can vary from one month to five years, but can be even longer.
Here’s a closer look at how CDs work, how they compare to other savings vehicles, and their pros and cons.
Key Points
• CDs require you to lock your money up for a set period of time and offer higher interest rates compared to standard savings accounts.
• CDs are insured by the FDIC, ensuring the safety of the deposited funds.
• Withdrawing funds from a CD before maturity typically results in financial penalties.
• If not withdrawn at maturity, CDs typically auto-renew, continuing the investment.
• High-yield savings and money market accounts serve as flexible alternatives to CDs.
Is a Certificate of Deposit Just a Savings Account?
A CD has some similarities to a savings account, but several differences. It’s a financial product designed to help consumers save their money, and because CDs typically pay a fixed rate of interest, they can offer savers a predictable return over time.
However, unlike a savings account, CD holders aren’t able to access the funds in their account whenever they feel like it — at least not without paying an early withdrawal penalty, (in most cases). CD holders are also not allowed to deposit more money into an existing CD, generally speaking, although they can buy another CD.
In exchange for giving up the ability to freely withdraw the money in a CD, the institution rewards CD holders with higher interest rates than they’d see in a typical savings account.
What Is APY vs Interest Rate?
An annual percentage yield, or APY, on a CD or savings account tells you how much interest you’ll earn on your money over one year. It includes the interest on the initial deposit, plus the interest on the interest that accumulates, which is called compound interest. An interest rate, on the other hand, only accounts for interest earned on the original amount.
An APY helps you avoid complicated calculations and compare different savings options to find the best yield. Longer term CDs generally pay higher APYs. However, that is not always the case, so it’s important to shop around and compare APYs and terms to find the best CD for your needs.
What Is a Jumbo CD?
A jumbo CD requires a higher minimum deposit than that required by regular CDs, typically $100,000 or more. In return for tying up a large sum of money, jumbo CDs tend to pay higher rates.
Like regular CDs, jumbo CDs are considered risk-free investments, as they’re typically insured up to $250,000 by the Federal Deposit Insurance Corp. (FDIC). CDs offered by credit unions have the same protection under the National Credit Union Administration (NCUA).
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How Does a Certificate of Deposit Work?
When a customer goes to open a CD they’ll be asked to put down a lump sum, often a minimum of $500 to $1,000.
The initial deposit placed in a CD is called the principal, because it is essentially a loan the consumer is offering to the bank. The interest the customer collects is what the bank pays for the privilege of borrowing their money.
Certificates of deposit also carry a “term,” much like a loan does; the term is the amount of time the funds must be left in the CD in order to glean the advertised interest rate. The term might be as short as a few months or as long as a decade. The day the term is over is also known as the CD’s maturity date.
Long story short: When opening a CD, a customer deposits a set amount of money for a set amount of time and agrees to leave it untouched in return for a relatively high fixed APY they’ll earn on the principal once the CD matures.
But how high, exactly, are the rates we’re talking about?
Certificate of Deposit Rates
Certificates of deposit are attractive savings options because they usually offer higher rates than the traditional savings accounts, but are also a lower-risk option than, for example, investing in the stock market.
Since funds in CDs are FDIC-insured, account holders can rest with some assurance that their cash won’t simply disappear (as it might when invested in shares of a company).
As of February 2025, the national average rate for a normal savings account is 0.61% APY, whereas the national average rate for a 12-month CD is 1.83% APY. The national average rate for a 60-month CD is about 1.53%. Online banks typically offer higher rates for savings accounts, and it’s possible to find CDs with higher than the average rates by shopping around.
But it’s possible to find CDs with even higher rates than that by shopping around.
Certificate of Deposits: Fine Print
There are a few more things it’s important to know about CDs before deciding to open one.
Generally, CDs automatically renew once the term is up if the account holder doesn’t take the money out. The bank will typically roll over the existing CD into a new CD with the same term, though the APY may be different. (For example, a one-year CD whose funds aren’t collected on the maturity date would be rolled over into a new one-year CD.)
Most financial institutions offer CD holders a grace period, or a fixed amount of days after the maturity date, during which the account holder can decide whether to withdraw the funds, transfer them to a new account or CD, or allow them to roll over.
Finally, but importantly, most CDs are generally subject to an early withdrawal penalty, which is incurred if the money is accessed prior to the maturity date. Early withdrawal penalties are determined by each financial institution. Depending on the policy, account holders could lose out on interest, or even lose some of their principal deposit.
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Certificates of Deposit: Pros and Cons
CDs can play an important role in an overall savings strategy because they balance growth and risk management. But as with any financial product, CDs have both drawbacks and benefits, which should be considered carefully before opening one.
Pros of CDs
• Because CDs are FDIC-insured, they’re a relatively low risk account. The FDIC insures up to $250,000, which means if an FDIC-insured institution goes out of business, account holders with a CD would receive their principal and interest, up to $250,000.
• Higher interest rates are available for CDs than for traditional savings accounts, making it easier to see a higher return on investment.
• For savers who are worried about spending down their savings, a CD provides a safe place to place cash, where it’s locked up for a certain period of time.
Cons of CDs
• Although CDs carry higher interest rates than some other types of savings vehicles, they don’t have the same kind of earning potential that stock market investments can have. By investing your money in a CD you’re losing out on potentially much higher market returns (but you’re also protected from market risk).
• CD holders generally don’t have the ability to withdraw their money at any time, at least without being subject to a penalty. That makes a certificate of deposit a poor choice for certain savings goals, like an emergency fund, which should be readily available.
• Savers will owe taxes on the earnings in the account, which effectively lowers the amount you earn. Be sure to take this into consideration shopping around for the best APY.
Where to Open a Certificate of Deposit
Certificates of deposit are available from a wide variety of financial institutions, including national and regional banks, credit unions, and some online-only financial institutions.
Shopping around can help ensure consumers find the best rates and most favorable terms for their needs.
That said, there are also some alternatives to opening a certificate of deposit that are worth considering carefully.
Alternatives to Opening a Certificate of Deposit
Although CDs can be a great way to earn interest, they’re far from the only high-interest account option out there. Here are a few options to mull over.
High-Yield Savings Accounts
Although typical savings accounts offer a relatively low interest rate, high-yield savings accounts are available from some banks. This option helps consumers combine growth potential with the ability to access their money as they need it, and can be a good alternative to CDs for those who aren’t ready to lock away their money for many months or years.
Certain high-yield accounts may offer a higher APY. However, there may be fine print involved requiring that savers meet certain terms in order to maintain that rate, such as making a minimum number of transactions per month or maintaining a minimum account balance.
It’s a good idea to review all the account terms carefully before opening any kind of financial account.
Money Market Accounts
Money market accounts are another option which, similarly to CDs, tend to offer higher interest rates than your typical savings account does. And unlike CDs, money market account holders are generally allowed to write checks or process debit transactions against their funds, which are still covered by FDIC insurance.
While money market accounts can earn higher interest rates than traditional savings accounts, there may be monthly restrictions on the number of deposits and withdrawals. Money market accounts may also require a high minimum balance in order to avoid monthly fees.
Stock Market Investments
Finally, for consumers focused on growing their money in the long-term, investing in the stock market can provide a lot of potential for growth. Historically, the S&P 500 — an index tracking 500 of the largest corporations in the U.S. — has seen an average annual return of 11.7% over the last decade.
Of course, an investment account is very different from a savings account or CD in that there is no FDIC insurance on the funds. Investments in the stock market are vulnerable to market fluctuation, and there’s no guarantee that investments will be safe and make money. It is important to remember that investments have no guarantee and are subject to potential losses.
That said, many financial professionals and advisors still recommend long-term investing as one of the best ways to grow wealth over time and as a part of an overall plan for long-term financial goals like retirement.
The Takeaway
A CD is a type of savings account that pays a fixed interest rate on money held for an agreed-upon period of time. Investing in a CD can be a good choice if you’re looking to put aside money for a set period of time and earn more than you could in a regular savings account. If you’d prefer to have more access to your funds, however, a money market account or high-yield savings account could be a better choice.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).
Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.
Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.
As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.
Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.
Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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