A certificate of deposit can be a wise investment at any time. Unlike savings rates, CD rates are fixed when you open an account, which means your earnings stay the same regardless of where overall rates go. And in today's falling-rate environment, that can be especially beneficial. But is a CD the best fit for you right now?
That depends. While the rate environment is one thing to consider when deciding whether you should open a CD, it isn't the only thing. Here's what you need to know about where CD rates currently stand, where they're heading and what that means for your money.
How the Federal Reserve affects CD rates
CD rates have been high for years as the Federal Reserve regularly raised the federal funds rate to fight inflation. This rate determines how much it costs banks to borrow and lend money to each other, so when the Fed raises it, banks tend to raise APYs on consumer products like CDs and savings accounts to boost their cash reserves.
Starting in March 2022, the Fed raised the federal funds rate 11 times and CD rates skyrocketed, reaching a peak of 5.65% APY for the CDs we track at CNET. As inflation began to show signs of cooling, the Fed hit pause, holding rates steady eight consecutive times starting in September 2023. CD rates held steady too, dipping only slightly as experts began to anticipate a rate cut at some point in 2024.
On Sept. 18, 2024, the Fed issued its first rate cut in years, indicating that another cut (or two) could be on the table for the remainder of the year. As a result, CD rates have been falling in earnest, with the highest APY for the CDs we track at CNET now below 5%.
If you've been considering opening a CD, it could be wise to act now before rates fall further. The sooner you do, the higher the APY you may be able to lock in -- and the greater your earning potential could be. That said, the best choice for you depends on several factors, and it's important to weigh them all.
“In terms of when is the right time to open a CD, there’s no right or wrong answer or exact moment," said Steve Goodman, managing director of consumer banking at JPMorgan Chase & Co.
Pros and cons of CDs
CDs come with advantages and disadvantages. Here’s what you should keep in mind when deciding whether to open one.
Pros
- Fixed interest rate: When you open a traditional CD, you lock in the interest rate for the entire term. So even if overall interest rates decline, your rate won’t change until your CD matures.
- Higher interest rates than other savings products: Most CD rates are higher than what you’ll find for traditional savings and money market accounts. However, this isn’t always the case. Right now, many online-only banks offer between 4% and 5% APY, but some traditional branch banks only offer 1% to 2.50% APY for the same terms.
- Insurance coverage: CDs are covered for up to $250,000 per person, per account at federally insured banks and credit unions via the Federal Deposit Insurance Corporation (for banks) or the National Credit Union Administration (for credit unions). This protects your funds in case your bank fails.
Cons
- Early withdrawal penalty: If you need to withdraw money from the account before the term ends, you’ll pay an early withdrawal penalty that can equal a few weeks or months of interest. This can eat away at your interest earnings and, in some cases, your initial deposit.
- Taxes: Interest you accrue on CDs is subject to federal and state taxes, which can put a dent in your earnings.
- Inflation: When prices go up, the value of your dollar goes down. If you’re investing in a CD, the interest rate may not be high enough to keep pace with inflation. That means even though you’re earning a return, it may not be as valuable today as it would be in a period of low inflation.
- Minimum deposit requirements: Some banks require a specific balance to score the highest CD rates. Make sure you compare a range of options to find the best rate based on how much you have to deposit.
When to consider opening a CD
A CD can be a great addition to your saving and investing strategy, especially if you fit into one of these categories:
You have a low-risk tolerance: If you’re nearing retirement age or you’ve already left the workforce, wild swings in the stock market can be especially challenging, and there’s a greater risk of losing your hard-earned savings. The guaranteed rate of return with a CD helps you avoid that risk. Plus, you can use your regular interest earnings to help cover some of your expenses.
You have a goal with a specific timeline: Perhaps you want to buy a house next year, and you’re working to save for the down payment and closing costs. If you plan to buy a place in 12 months, you may want to think about a short-term CD -- six or nine months, for example -- to help accelerate your savings before you apply for a mortgage preapproval. If, for example, you deposit $10,000 in a nine-month CD with a 4.50% APY, you’ll earn $335.64 when your CD term ends.
You want to prevent overspending: Early withdrawal penalties can help you avoid the temptation to dip into your savings. If you want to put an extra lock on your money that stands in the way of frivolous spending, a CD can help you think twice before withdrawing your cash.
When to avoid opening a CD
CDs aren’t for everyone. If you’re worried you’ll need the money before the end of your CD’s term, don’t open a CD. For example, if your company recently went through a round of layoffs, your job security may not feel that solid. With that in mind, it’s important to keep your cash accessible.
In addition, if you’re young, new to the workforce and focused on placing aggressive bets on the stock market in the hopes of a long-term payoff, CDs may not be the best fit. Instead, you should look into other places to park your money where you can withstand the volatility and risk if you have a longer time horizon.
CD alternatives
- Traditional savings accounts: These accounts provide a modest interest rate -- often lower than CDs -- but in some cases, there are no withdrawal restrictions. You may also have access to a physical location as most traditional savings accounts are at branch banks.
- High-yield savings accounts: These accounts offer higher interest rates than regular savings accounts. You may be able to store money without fees or requirements, depending on the bank. Many high-yield savings accounts are offered by online-only banks, so you should feel comfortable with an entirely digital banking experience.
- Money market accounts: These accounts usually require a higher minimum balance than a savings account and may require a higher minimum balance to earn interest. But you’ll have more checking account features, such as an ATM card and check writing.
How to maintain flexibility while using CDs
Don’t let the withdrawal restrictions of traditional CDs scare you. You can deposit some of your money into a CD while still keeping other funds available easy access in a financial pinch. Here are some other savings options to maintain flexibility while scoring the higher earning potentials of CDs.
Look for a no-penalty CD: No-penalty CDs mean you won’t pay a penalty if you wind up needing some -- or all -- of your money before the term is up. While you’ll earn a lower rate than a traditional CD, you could set aside some of your funds for a no-penalty CD to ease your money worries.
Keep some of your cash in a high-yield savings account: The best high-yield savings accounts pay upward of 4% APY right now. You’ll get the best of both worlds with these: a high APY on par with CD rates and easy access to your money for regular contributions and withdrawals.
Build a CD ladder: CD ladders are a great strategy for diversifying your money with minimal risk. For example, let’s say you have $12,000 to put in a CD. Rather than locking all of it in a three-year CD, you might deposit $3,000 in a six-month CD, $3,000 in a one-year CD, $3,000 in a two-year CD and your remaining $3,000 in a three-year CD. This way, you’ll have money coming due every year, and you can spread out your funds across different rates.
Reevaluate your strategy during your grace period: Most CDs automatically renew shortly after the term ends, but you’ll have a grace period -- typically 10 days -- to decide whether you want to reinvest the money, withdraw it or pick a different place to keep it. Make sure you mark your calendar with your maturity date and watch out for alerts from your bank to determine the best route when your CD term is up.
Is a CD better than a high-yield savings account?
CDs and high-yield savings accounts offer some of the best interest rates you can find today without taking on any risk. However, neither is necessarily better than the other; choosing one ultimately comes down to your timeline.
High-yield savings accounts are a great place to keep your emergency fund. This way, the money you’ve set aside for a worst-case scenario can continue to grow, and you’ll have access to it if you need it suddenly. What’s more, you don’t have to choose just one account. Once you hit your emergency fund or other savings goal, you might want to put some of the excess money in a CD to take advantage of a rate that beats your savings account rate.
The bottom line
CDs are a safe investment that can net you a higher return than most savings and money market accounts. And with APYs dropping, now can be a good time to lock in your rate if you’ve been thinking of opening a CD. Just be sure to weigh the pros and cons in light of your savings goals.
“Assess your needs, keep an eye on rates and research what’s best given your individual situation and needs,” said Goodman.
FAQs
The biggest drawback of opening a CD is losing your liquidity or flexibility to deposit and withdraw funds. Traditional CDs come with early withdrawal penalties, which wipe away most — if not all — of your interest if you take out the money before maturity.
Yes. While you can lose a lot of money in the stock market, one of the big selling points of CDs is that your principal is protected by federal deposit insurance for up to $250,000, per person, per account at FDIC-insured banks or NCUA-insured credit unions. Even if the stock market plunges and the bank that holds the CD collapses, you’ll still get your money back.
To make sure you don’t lose the money you’ve deposited into a CD, follow these two simple rules: First, make sure your entire deposit is covered by FDIC or NCUA insurance. Second, don’t access the funds before the maturity date to avoid paying any early withdrawal penalties.
Experts expect the Federal Reserve will cut the federal funds rate at least once more before the end of the year, which means CD rates are likely to keep falling in the coming months.
Correction: An earlier version of this article was assisted by an AI engine and it mischaracterized some aspects of CDs and savings accounts. Those points were all corrected. This version has been substantially updated by a staff writer.
