What is a CD? How certificates of deposit work

Last reviewed Oct 29, 2026 · CompareCDRate editorial team · General education, not financial advice

The basics

A certificate of deposit (CD) is a deposit account at a bank or credit union that holds your money for a fixed period, called the term, at an interest rate set when you open it. Terms usually run from three months to five years, though some institutions offer shorter or longer ones. At the end of the term — the maturity date — you get back your deposit plus the interest it earned.

The deal is simple: you promise not to touch the money until maturity, and in return the institution typically pays a higher rate than a regular savings account and guarantees that rate for the whole term. If you do need the money early, you’ll usually pay an early withdrawal penalty.

At credit unions, CDs are often called share certificates. They work the same way.

How CD interest works

Banks advertise CDs using the annual percentage yield (APY), which reflects both the interest rate and how often interest compounds. Most bank CDs compound daily or monthly and add interest to the balance, so you earn interest on your interest. Some let you take interest out as income instead, which lowers your effective return slightly.

For example, $10,000 in a 1-year CD at 4.50% APY grows to $10,450 at maturity. The same $10,000 in a 5-year CD at 4.50% APY grows to about $12,462, because the interest keeps compounding.

Types of CDs

• Traditional CD: fixed rate, fixed term, penalty for early withdrawal.
• No-penalty CD: lets you withdraw early (usually after the first week) without a penalty, often at a slightly lower rate.
• Bump-up or raise-your-rate CD: lets you request a higher rate once or twice during the term if the institution’s rates rise.
• Add-on CD: allows additional deposits after opening.
• Jumbo CD: requires a large minimum deposit, often $100,000.
• Brokered CD: bought through a brokerage, can be sold on a secondary market, and may be callable.
• IRA CD: a CD held inside an individual retirement account, following IRA tax rules.

Pros and cons

How to choose a CD

1. Decide when you’ll need the money and choose a term that ends on or before that date. Our maturity planner helps.
2. Compare APYs across banks, credit unions and brokerages — our rate table shows dated listings.
3. Check the minimum deposit, membership requirements, and penalty.
4. Confirm insurance and keep your balance within limits.
5. Verify the current rate with the institution and open the account directly.

Frequently asked questions