What a certificate of deposit (CD) account is and how it works

What is a certificate of deposit (CD)?

A CD is a type of savings account offered by banks and credit unions that gives you a secure way to grow your money. Unlike other savings accounts, a CD is a time deposit, meaning you agree to leave your money in the account for a fixed period in exchange for a higher interest rate, giving you better returns.

CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions—so you can get better returns knowing your money’s safe. 

Types of CDs

There are different types of CDs to choose from.

Traditional CD: Offers a fixed interest rate and term length, making it predictable and stable

Bump-up CD: Allows you to increase your interest rate once during the term if rates go up

Liquid CD: Provides limited access to your funds with fewer penalties than traditional CDs

No-penalty CD: Allows you to withdraw your money early without paying a penalty

Jumbo CD: Requires a large minimum deposit, often $100,000 or more, and may offer higher rates in return

Pros and cons of CDs

Pros:

• Higher interest rates than traditional savings accounts
• Safe and predictable investment
• Helps you stick to a plan and avoid spending the money

Cons:

• Money is locked in until the term ends
• Penalties for early withdrawal
• Might earn less than stocks or bonds

When does it make sense to use a CD?

A CD can be a smart choice if:

• You have short- to medium-term savings goals
• You want a secure option in your portfolio
• Interest rates are high, giving you better returns
• You want to lock in a rate when the economy feels uncertain

How to open a CD account

You can open a CD at most banks, credit unions, or online financial institutions that offer them. You’ll need to deposit a fixed amount of money and select your term.

Note: To open a Sallie Mae CD Account, a $2,500 deposit is required.

Here’s some info you’ll need to apply:

• Full legal name
• Mailing address
• Social Security number or tax ID
• A government-issued photo ID (like a driver’s license or passport)
• Bank account information to fund the CD (checking or savings)

You may be asked for additional background information, such as your employment status or financial history, so the institution meets regulatory requirements.

Alternatives to CDs

If you need more flexibility or access to your funds sooner, a CD might not be the right fit. Other low-risk options might be a better fit, like:

High-yield savings accounts

These typically offer competitive interest rates and let you withdraw money at any time. Rates may vary with market conditions.

Money market accounts

These also offer flexibility and may provide check-writing or debit access, with slightly higher yields than those of traditional savings accounts.