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What is a Certificate of Deposit and How Does it Work?

Certificates of deposit (CDs) are popular ways to save money securely over a set period. They offer steady growth, making them attractive to those who want a safe place for their savings.

This guide breaks down what CDs are, how they work, and who might benefit from them.

Certificate of Deposits Explained

A certificate of deposit is a savings account with a fixed interest rate and a set term. Unlike regular savings accounts, CDs require you to keep your money locked in for a specified time, known as the "term."

CD terms can range from a few months to several years. In return, the bank offers you a higher interest rate than you’d earn with a standard savings account.

CDs are secure deposit products, which means they come with minimal risk. If the bank is FDIC-insured, their CDs are also insured up to the legal limit, so your funds stay protected.

Also, CDs are designed to offer a predictable amount of interest earned when you keep the money in the account through the agreed term.

How Do CDs Work?

When you open a CD, you agree to a specific term and interest rate. The interest rate remains fixed for the CD’s duration, so you’ll know exactly how much you’ll earn. And, interest is usually compounded. This means it’s calculated on both your initial deposit and any interest that has accrued over time.

CD terms vary widely, and the bank often offers higher interest rates for longer terms. Many CDs require a minimum deposit amount, which can vary by bank. Interest is either added to the CD balance or transferred to another account periodically, depending on your bank’s policies.

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Is it Possible to Lose Money on a CD?

It’s not typically possible to lose money on a CD if you keep it until it matures. CDs are safe, fixed-term deposit accounts. Since they are insured up to the FDIC limit, your principal is protected up to $250,000.

However, there are a few situations where a CD might end up costing you indirectly:

Early withdrawal penalties.
Inflation.
Interest rate opportunity cost.

Withdrawing from a CD early can result in a penalty, which might reduce your interest or even your initial deposit. Rising inflation can also erode your CD’s purchasing power. And, if interest rates climb while your money is locked in, you could miss out on higher earnings elsewhere.

Pros and Cons of a CD

CDs are a safe, fixed-rate way to grow your savings, often earning more interest than regular savings accounts. Like all financial accounts, CDs have benefits and drawbacks.

Pros of a CD include:

CDs are insured up to $250,000 per depositor, per FDIC-insured bank, per ownership category so, your money is protected.
You lock in an interest rate, so your earnings stay the same even if rates go up or down.
CDs usually pay more interest than standard savings accounts.

Cons of a CD include:

Taking money out before the CD term ends usually means a penalty, which could cut into your interest or even your initial amount.
If prices go up quickly, your CD’s value in real terms might not keep up.
Once you put money in a CD, you probably can’t touch it without a penalty until the term is over.

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What Happens When a CD Matures?

When your CD term ends, it’s considered "mature," and you have options for what to do with the funds. Generally, banks notify you shortly before maturity so you can decide on your next steps.

When your CD reaches maturity, you have a few options:

Withdraw your funds.
Renew or rollover your funds.
Adjust your CD strategy.

You can take the money, including any interest earned, and transfer it to another account. Many banks let you roll the funds into a new CD with the same or different term. This is useful if you want to keep earning interest without needing to reinvest manually.

Some people use CD laddering. This is where they invest in multiple CDs with staggered maturity dates to keep funds accessible over time.

Who Should Consider Opening a Certificate of Deposit?

CDs are suitable for people who:

Want a secure, predictable place for savings.
Are okay with not touching the funds for a while.
Seek an alternative to low-yield savings accounts.

People who may find CDs especially helpful include retirees, individuals saving for specific short-term goals, and anyone looking to diversify savings strategies.

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How To Open a Certificate of Deposit

Opening a CD typically requires the following steps:

Choose your CD term.
Visit a location or Apply Online to open a consumer CD.
Fund the account with your initial deposit.
Make any following deposits as agreed.

Opening a CD can often be online or in-person, depending on the bank’s options. If you need help deciding on the best term for your goals, Centier provides easy access to customer support.

Discover Your Potential Growth with Competitive CD Rates

Now that you know what a certificate of deposit is and how it works, you can see that they offer a safe and structured way to save, particularly if you want predictable earnings. While they’re not suited for those who need immediate access to their money, they’re an excellent option for people looking to secure their savings over time.

To find out how much you could grow your savings with Centier, check out our CD calculator.