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Are CDs worth it?

Yahoo Personal Finance· Getty Images
Kat Tretina
Updated 7 min read

Yes, they’re low-risk, but certificates of deposit (CDs) aren’t exactly sexy. While stocks and cryptocurrency receive a lot of buzz, CDs can seem old-fashioned and boring by comparison.

However, CDs are shedding their lackluster reputation and experiencing a resurgence in popularity. According to the Wall Street Journal, balances in CDs have skyrocketed, going from $36.5 billion in April 2022 to $418.4 billion in January 2023. That's because CD rates have soared. CD rates today can top 5%, far exceeding the typical savings account's annual percentage yield (APY).

But are CDs worth it? CDs can be a good way to grow your money with relatively low levels of risk. High-yield CDs offer higher interest rates than savings accounts, and you can choose terms that meet your needs. However, CDs do require you to sacrifice some liquidity, so they’re best for people who don’t need the money to cover immediate expenses or short-term goals.

Before depositing your money, learn how CDs work and their benefits and drawbacks.

If you’ve looked at traditional savings accounts lately, you may be surprised at how little many pay in interest. Opening a CD instead may allow you to earn a higher return on your money.

CDs are a type of deposit account that you can open through banks, credit unions, and other financial institutions. With a CD, you deposit money and commit to holding it in the account for a specific period, ranging from one month to 10 years, or even longer. In exchange, the bank pays you higher interest.

The interest is usually paid in regular intervals and once the CD “matures” — reaches the end of its term — you receive the principal amount and the accrued interest. Once the CD reaches its maturity date, you can either cash it out or roll it over into a new CD to continue earning interest.

Generally, CDs provide higher yields than traditional savings accounts. As of May 2024, the last reported data, the average fixed rate for a 12-month CD was 1.80% — about three times higher than the average rate for savings accounts.

But — as with high-yield savings accounts — you may find much higher APYs by shopping around. You’ll tend to find the highest CD rates at online banks that have no brick-and-mortar branches. If you can, though, compare the best CD rates from all of them.

Read more: How to calculate interest on a CD

Although CDs are increasingly popular, they aren’t the only way to make your money grow. Depending on your financial situation and your goals, you may be better off with one of the following options:

  • Traditional savings accounts

  • High-yield savings accounts, or HYSAs

  • Bonds

A regular savings account is a popular option to stash money for a rainy day. You can open a savings account with a bank or credit union and earn interest on the amount in the account.

Although CDs and traditional savings accounts can both be useful tools, they differ in several key ways:

  • Savings account pro: With a traditional savings account, you’re not beholden to keeping your cash there for any amount of time — you have immediate access to your money. You can withdraw cash at an ATM or transfer money to a checking account. With a CD, you agree to leave your principal in the account for a set period. Otherwise, you’ll pay early withdrawal penalties or forfeit interest.

  • Savings account con: Traditional savings accounts generally pay lower interest rates than CDs. As of August 2023, the average APY on saving accounts was just 0.43%.

High-yield savings accounts often have higher-than-usual APYs, typically offered by online banks and credit unions. The best rates for HYSAs might be lower than you may find with some CDs, but HYSAs are more accessible. Here’s how CDs and HYSAs compare:

  • HYSA pro: You don’t have to commit to leaving your money untouched, and you can make withdrawals or transfer money whenever you like.

  • HYSA con: Rates on HYSAs can change. While the rate on a CD is usually fixed for its term, HYSAs can rise and fall over time.

Bonds are an investment tool you can use to grow your money with relatively low levels of risk. They function like IOUs; the issuer — often a company or government institution — sells the bond to raise money for its operations.

Comparing CDs vs. bonds reveals some major differences. A certificate of deposit usually has a fixed interest rate that lasts for the duration of its term. By contrast, the rate of bonds can fluctuate.

  • Bonds pro: You get income from interest payments regularly throughout the bond’s term. You also get the bond’s principal, known as the face value, when the bond matures.

  • Bonds con: A bond's value can change. Bonds have an inverse relationship with interest rates. When interest rates go up, bond prices tend to go down, and vice versa.

As mentioned above, the average interest rate on a one-year CD is 1.76% as of August 2023. However, it’s possible to find much higher rates. Today’s best CD rates far exceed the national average. CD rates haven't been this high in more than two decades. Combine falling inflation with U.S. banks starved for deposits, resulting in a nearly unmatched total return on cash. One-year certificate of deposit yields are pushing past 5% and are edging ever closer to a compelling 6% yield.

CD rates vary based on the financial institution, minimum deposit amount, and term. In the current market, it’s true that average interest rates increase between one-month and one-year CDs. Yet, at the moment, that upward interest rate trend isn't consistent with all longer-term CDs. According to the FDIC, two-year CDs have an average APY of 1.53%, but a five-year CD sits at 1.38% — the best CD rates aren’t necessarily tied to accounts with the longest terms.

Pros and cons of a CD account

  • You'll typically pay a penalty if you need your cash before a CD’s maturity date.

  • The competitive rates on CDs — especially longer-term CDs — might not keep up with inflation.

  • The minimum balance needed to open a CD may be too high.

  • Although CDs are safer, they offer lower returns than mutual funds and stocks.

Yes, like traditional savings accounts, CDs are insured by the Federal Deposit Insurance Corp (FDIC). CDs opened with a credit union are insured by the National Credit Union Administration (NCUA). Your CDs are covered by up to $250,000 of deposit insurance.

CD rates are determined by several factors, including rate hikes, the Fed’s target rate, the length of the CD term, the minimum deposit requirement, and the financial institution offering the CD. It’s wise to shop around and compare rates and terms to find the best APY.

CD laddering is an investment technique used to take advantage of higher CD interest rates while giving you quicker access to at least part of your money. You purchase CDs with different maturity dates, creating a ladder that allows you to take advantage of higher CD rates without losing liquidity.