Certificate of deposit (CD)

Also called Share certificate

A deposit that pays a fixed interest rate for a set term, such as one year, with a penalty if you withdraw before it matures.

What it means

With a CD, you agree to leave a sum with a bank or credit union for a fixed term, often from a few months to five years or more. In return, the institution usually pays a fixed rate for the whole term, which locks in your earnings even if market rates fall. At credit unions the same product is often called a share certificate.

If you take the money out before the maturity date, you typically pay an early withdrawal penalty, often a set number of months of interest; the exact penalty varies by institution and term. CDs are covered by FDIC or NCUA insurance up to the standard limits. Some people build a CD ladder, with CDs maturing at staggered dates, to balance higher rates with regular access to cash.

Example

Suppose someone puts $10,000 in a 1-year CD at 4% APY. At maturity they would have about $10,400. If the penalty for early withdrawal is 90 days of interest and they cash out early, they would give up roughly $100 of interest.

How it’s used

Saving for a goal with a known date
Locking in a rate when rates may fall
Building a CD ladder for steady access to cash

Strengths and weaknesses

Strengths

Fixed, predictable return
Insured and no market risk
Often higher rates than regular savings for longer terms

Weaknesses

Early withdrawal penalties
Money is tied up for the term
Fixed rate may fall behind if rates or inflation rise

Good to know

Many CDs renew automatically at maturity, so note the date and the grace window for changes.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.