What happens when you buy a CD

When you purchase a certificate of deposit, you give a bank or credit union a sum of money for a fixed period — usually three months to five years — and they pay you a set interest rate. You cannot withdraw the money before that time ends without paying a penalty, usually a loss of some or all of the interest you earned. At maturity (when the term ends), the bank returns your original deposit plus the interest, or automatically rolls it into a new CD if you do not tell them otherwise.

The main appeal is that the interest rate is locked in and may provide. Unlike a savings account, where rates can drop, your CD rate stays the same for the entire term. The tradeoff is that your money is not available for emergencies without cost.

Key Takeaways

  • You can buy a CD at any bank or credit union by opening an account, choosing a term length, and depositing money — the process usually takes 15 to 30 minutes in person or online.
  • CD rates and terms vary by institution, so comparing offers from three or four banks before you commit can mean hundreds of dollars in difference over the life of the CD.
  • The early withdrawal penalty is set by each bank and can range from a few months of interest to the entire interest earned, so read the terms before you deposit.
  • Your CD is insured up to $250,000 per depositor per bank by the FDIC (or NCUA at credit unions), so your principal is protected even if the bank fails.

Where to buy a CD

You can purchase a CD at any bank or credit union. Most people buy them at the institution where they already have a checking or savings account, but you are not required to. Online banks often offer higher rates than brick-and-mortar banks because they have lower overhead costs. Credit unions sometimes offer competitive rates to their members.

Before you choose a bank, compare the rates and terms they offer. A bank's website usually lists current CD rates by term length on the main page or under a "Rates" or "CDs" section. You can also call the bank directly or visit a branch. Comparing rates across even three banks can reveal differences of 0.5% or more, which adds up over time.

Steps to purchase a CD

The process differs slightly between online and in-person purchases, but the basic steps are the same.

In person at a branch: Walk in during business hours and ask to speak with a banker or customer service representative. Tell them you want to open a CD. They will ask you to choose a term (the length of time your money will be locked in) and confirm the amount you want to deposit. You will need to provide your Social Security number, address, and photo ID. The banker will explain the interest rate, the maturity date, and the early withdrawal penalty. You will sign the CD agreement and hand over your deposit. The CD is usually active the same day.

Online: Log into your bank account or visit the bank's website. Look for a "CDs" or "Certificates of Deposit" link, usually under "Savings" or "Products." Click to open a new CD. Select your term length and enter the amount you want to deposit. Review the interest rate, maturity date, and penalty terms. Confirm your Social Security number and address (the bank already has these if you have an existing account). Review and sign the CD agreement electronically. The CD is usually active within one business day.

By phone: Call the bank's customer service number and ask to open a CD. A representative will walk you through the same questions: term length, deposit amount, and confirmation of your identity. They will mail you the CD agreement to sign and return, or you may be able to sign electronically. This method is slower — it can take three to five business days for the CD to become active.

Understanding CD terms and rates

The term is how long your money stays in the CD. Common terms are 3 months, 6 months, 1 year, 2 years, 3 years, and 5 years. Longer terms usually pay higher interest rates because the bank has your money for a longer period. A 5-year CD might pay 4.5%, while a 3-month CD might pay 3.8%. The tradeoff is that you cannot access your money without penalty for a longer time.

The interest rate is what the bank pays you. It is expressed as an annual percentage rate (APR). The interest is usually compounded daily or monthly, meaning you earn interest on your interest. When the CD matures, you receive your original deposit plus all the interest earned.

The early withdrawal penalty is what you lose if you take your money out before maturity. Penalties vary widely. Some banks charge three months of interest; others charge six months or a full year. A few charge a percentage of the deposit itself. Read the CD agreement carefully to understand the exact penalty before you commit.

What to do when your CD matures

When your CD reaches its maturity date, the bank will notify you (usually by mail or email) a week or two before. At that point, you have three options: withdraw the money, roll it into a new CD, or move it to another account.

If you do nothing, most banks automatically roll your CD into a new one with the same term at the current rate. This is called an automatic renewal. If you do not want this, you must contact the bank before the maturity date and tell them what you want to do instead. Some banks give you a grace period of 7 to 10 days after maturity to change your mind without penalty.

FDIC insurance and CD safety

Your CD is protected by FDIC insurance (Federal Deposit Insurance Corporation) if you buy it at a bank, or by NCUA insurance (National Credit Union Administration) if you buy it at a credit union. This means if the bank or credit union fails, the government guarantees you will get your money back, up to $250,000 per depositor per institution.

If you have more than $250,000 to invest in CDs, you can spread the money across multiple banks to stay within the insurance limit at each one. For example, you could buy a $250,000 CD at Bank A and another $250,000 CD at Bank B, and both would be fully insured.

CD laddering: a strategy for access

One way to balance the higher rates of longer-term CDs with the need for access to your money is called CD laddering. You buy multiple CDs with different maturity dates. For example, you might buy five 1-year CDs, each with a $1,000 deposit. One matures every few months. When each one matures, you can withdraw the money, roll it into a new 5-year CD (which pays more), or keep it in a shorter-term CD.

This strategy lets you take advantage of higher long-term rates while still having some money available without penalty every few months. It requires more planning and tracking, but it can increase your earnings if rates are rising.

Frequently Asked Questions

Can I withdraw money from a CD before it matures?

Yes, but you will pay an early withdrawal penalty set by the bank. The penalty is usually a loss of interest — sometimes three months' worth, sometimes more. Some banks charge a percentage of the deposit itself. Read the CD agreement to know the exact penalty before you buy.

What is the difference between a CD and a savings account?

A savings account has no term and no penalty for withdrawal, but the interest rate is usually lower and can change at any time. A CD locks in a higher rate for a set period, but you cannot touch the money without paying a penalty. Choose a CD if you have money you will not need for several months or years.

Do I need an existing account to open a CD?

No. You can open a CD at any bank or credit union even if you have never done business with them before. You will need to provide your Social Security number, address, and photo ID, just as you would to open a checking account.

What happens if the bank fails while I have a CD?

The FDIC or NCUA will pay you back up to $250,000. Your CD is treated the same as any other deposit at the bank. You do not lose money because of bank failure — the insurance covers it.

Can I buy a CD for someone else?

You can open a CD in someone else's name if you have their permission and their Social Security number, but the CD belongs to them, not you. If you want to set aside money for a child, ask the bank about CDs in a minor's name or custodial accounts.