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What is a callable CD?

Callable CDs are rare and come with certain restrictions. Learn more about how they work.

Yahoo Personal Finance· Getty Images
Sarah C. Brady
·Contributor
5 min read

Want to earn more than 5% interest on a certificate of deposit (CD)? A callable CD can help — sort of.

Callable CDs typically provide a higher starting APY than traditional CDs. However, the high rate is only guaranteed for a set period of time after you open the account — sometimes as little as three months. After the initial period ends, the CD issuer can "call" or close the account, even if the maturity date is still years in the future.

Here’s what you should know about callable CDs and whether they make sense for you.

With callable CDs, the issuing bank can terminate the CD at different points before it reaches the maturity date. Whether your CD is issued by a bank, a credit union, or a broker, your account is likely to be called if interest rates fall. However, as with traditional CDs, you can't elect to close the account on your own without facing a penalty.

The benefit of opening a callable CD is that during the initial "lock period," or the time frame when the account can't be called, you may have an above-average APY. For most accounts, the lock period is between six months and a year.

After the lock period, a "call period" begins, during which the issuer can choose to close the account. Depending on the specific account, it may be called at different times:

  • Discrete call dates: The account can be terminated at set intervals, such as once every six months. Most callable CDs have this option.

  • One-time call date: Your issuer can only call the account on one specific date.

  • Continuous call dates: The account can be called any time after the lock period ends.

If your CD does happen to be called, you'll get your principal deposit back, plus any interest you've accrued up to the date of the call.

Callable CDs are difficult to find, especially when interest rates are high. There's a chance your local credit union or bank offers callable accounts, but you might have an easier time finding one through a broker.

Brokered CDs have drawbacks, though. Unlike banks and credit unions that pay compound interest, brokers pay simple interest and they may charge fees, too. Brokered accounts can also be risky since some brokers are not licensed or certified and their CDs aren't necessarily FDIC-insured. One upside is that you can sell a brokered account on the secondary market before the maturity date.

Some examples of callable CDs available today include:

  • Texas Bay Credit Union: Choose between a callable 24-month CD with 5.69% APY or a 60-month option at 5.38%. For both accounts, the minimum deposit is $50,000, the lock period ends at 90 days, and the CD can be called every six months.

  • MidFirst Bank: The bank doesn't post CD rates online, but it offers two-year and seven-year callable CDs with lock rates ranging from three months to three years. The minimum deposit is $5,000.

Vanguard: Terms range from seven months to 10 years on their callable CDs, with the highest rate available on 10- to 12-month callable CDs (currently 5.50%). These accounts accrue simple interest, but they're FDIC-insured and have no fees. You can deposit increments of $1,000.

With callable CDs, you lose when rates go up and when rates go down.

If interest rates decrease, which could happen later this year, your account is likely to be called, and you'll find it difficult to earn the same APY by moving your funds to a new CD. If rates increase, your account will stay open until the maturity date, but you'll lose out on the opportunity to earn more money.

The only way to win with a callable CD is if interest rates stay roughly the same. However, considering that CD rates can change as often as monthly, the odds aren't in your favor.

Sure, you can earn above-average starting APY during the lock period on a callable CD, but the higher the APY on the account, the shorter the lock period. Further, you may need to go through a brokerage to buy one, which means potentially increasing your risk, paying fees, and losing out on compound interest.

There are plenty of ways to earn the 5%+ APY you can get during the lock period on callable CDs these days. Here are some better options to explore:

If you're looking for high returns on a short-term investment, traditional CDs are hard to beat. With a traditional CD, you're guaranteed a set rate of return for the full account term. While they don't always offer the same starting interest rates as callable CDs, you can currently find plenty of CDs with 5% APY or more.

If your goal is to lock in a high rate of return on a low-risk, short-term investment, a Treasury security is another good bet. The rates on T-bills, for example, are comparable to CDs when you invest for a year or less, and you can currently earn 5.41% on a 17-week bill. Unlike CDs, you don't have to pay state taxes on the interest you earn, and T-bills are easy to find, even when interest rates are high.

If you can invest your money for three years or more, buying stocks can earn you more than CDs and most other investments. While the value of your stock holdings can fluctuate drastically, the stock market has historically delivered average returns of around 10%. You can also reduce your risk of losing money by investing in an index fund or making other moves to create a diverse portfolio.