A certificate of deposit, or CD, is a savings product that pays a fixed interest rate for a set term in exchange for leaving the money untouched until it matures. Open a one-year CD and you agree a rate up front, the bank holds the deposit for the year, and you get your money back plus interest at the end. Take it out early and you usually pay a penalty of several months of interest.

CDs trade flexibility for certainty. Unlike a savings account, whose rate the bank can change at any time, a CD locks the rate for the whole term. That is the appeal when you expect rates to ease, and the drawback when they do not.

How a CD works

You choose a term, commonly three months to five years, and deposit a lump sum. The bank pays a stated annual percentage yield, the APY, which already accounts for compounding, so it is the number to compare between offers. At maturity you can withdraw the money or roll it into a new CD.

CDs at banks are covered by federal deposit insurance up to $250,000 per depositor, per bank, per ownership category, the same protection that applies to a checking or savings account, which we cover in how FDIC deposit insurance works. Credit-union CDs, sometimes called share certificates, carry equivalent coverage through the National Credit Union Administration.

What CDs pay in 2026

Averages and the best available rates are far apart, so both are worth knowing. As of October 19, 2026, the FDIC national average was 1.76 percent for a 12-month CD, 1.39 percent for six months and 1.41 percent for five years, against a 0.38 percent national average for a basic savings account. Those averages are dragged down by large banks that pay very little.

The best nationally available CDs pay much more. Bankrate's survey as of October 20, 2026 showed top rates around 4 to 5 percent, with the highest yields generally on shorter terms. The gap between the 1.76 percent average and a 4 percent-plus top rate is the single strongest argument for shopping around rather than taking your existing bank's offer.

The early withdrawal penalty

The catch that defines a CD is the penalty for breaking it. Pull money out before maturity and the bank typically charges a set number of months of interest: often three months on a short CD and six months to a year on a longer one. On a CD you have held only briefly, the penalty can eat into principal, not just interest.

That is why a CD suits money you are confident you will not need before the term ends. For a genuine emergency cushion, a penalty-free savings account is the more sensible home, because reaching the cash is the whole point.

CD laddering

Laddering is the standard way to soften the lock-up. Instead of putting $25,000 into one five-year CD, you split it into five CDs maturing one year apart. Each year one matures, giving you access to a fifth of the money, which you either spend or roll into a new five-year CD at the going rate.

A ladder means you are never more than a year from some of your cash, and you are not betting the whole sum on one day's rate. It is a simple structure, not a product you buy, and most banks let you build one with ordinary CDs.

CDs vs a high-yield savings account

A high-yield savings account pays a variable rate you can usually reach any time, while a CD pays a fixed rate you cannot touch without penalty. When top savings accounts and top CDs pay similar yields, as they often do, the real question is whether you value the locked rate of the CD or the access of the savings account.

A CD makes most sense for a sum with a known date attached, a tuition bill next autumn, a house deposit in two years, where the fixed rate removes the risk that savings rates ease before you need the money. The rate on that CD is set the day you open it, so the current figure is what matters, not where rates were last year.

Variations worth knowing

Not all CDs lock you in the same way. A no-penalty CD lets you withdraw once without a charge, usually in exchange for a slightly lower rate, which suits money you expect to keep put but might need. A bump-up CD lets you raise your rate once if the bank's rates move higher during the term. A brokered CD is bought through a brokerage rather than direct from a bank; it can be sold before maturity on a secondary market, but the price you get then can be below what you paid, so it is not the penalty-free exit it sounds like.

CD rates broadly track the Federal Reserve's policy rate, because that sets the short-term rates banks pay to borrow. When the Fed holds its target range steady, as it has for much of 2026, CD rates tend to move little, and the relationship between the policy rate and what you earn is explained in the fed funds rate versus the prime rate.

Where a CD fits

Think of a CD as a tool for money with a deadline, not for money you might need tomorrow and not as a growth investment. Compare the APY, not the headline rate, check the exact early-withdrawal penalty before you sign, and confirm the institution is federally insured. The averages move, and the gap between the average and the best offer is usually wide, so the current top rate for your term is the figure to check the day you open one.