What is a CD and when should you open one?

What is the interest rate for a CD?

The interest rate on a CD is usually fixed, meaning it doesn't change over the life of the CD. That's different from savings account rates and money market rates, which usually are variable and can change at any time. The market conditions at the time you open your account are mainly what determines the interest rate you earn on a CD.

Generally speaking, the longer the term of the CD, the higher the interest rate because you're agreeing to keep your money in the account for the duration set forth in the terms. In exchange for that commitment, the bank pays you a higher interest rate than it would on a savings account.

What does it mean when a CD matures?

The key to making CDs work for you is knowing when they mature. A CD matures on the date specified in the account agreement. At that point, you can cash out the CD and get your money plus interest, or you can renew the CD for another term.

The biggest risk with a CD is that you lose free access to your money if you need it before the CD matures. If you need to withdraw money early, you may be able to do so, but you'll typically pay a penalty.

The specific rules vary depending on the bank and the type of CD, but early withdrawal penalties can be equal to or exceed several months' worth of interest.

The best way to avoid these penalties is to only invest money in a CD that you know you won't need for the full length of the CD term. That way, even if an emergency comes up, you can leave your money untouched and continue to earn interest without having to worry about paying any penalties.

Overall, here’s what to consider when deciding whether or not to open a CD:

• How much money do you have to deposit?
• How long do you want to leave your money untouched?
• What kind of interest rate are you looking for?
• Could you need access to your money before the CD matures?
• What are the fees associated with the CD?

Once you've answered these questions, you'll have a better idea of what kind of CD is right for you — if at all. It’s important to choose a CD term that makes sense for your specific financial goals, but overall, CDs can be a lower-risk investment option as part of a broader savings strategy.

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