How Does a CD Work?

A CD is a form of “time deposit.”2 In return for a higher interest rate, you promise to keep your cash in the bank for a pre-determined amount of time. The bank agrees to pay you more interest than you’d get from a savings account in exchange for that agreement. You’ll receive a higher annual percentage yield (APY) on the funds you deposit because the bank knows that it can use your money for longer-term investments like loans and you won’t come asking for it next week.3

It’s up to you how long you want to keep your funds locked up when you open a CD. This time period is called the term.

CDs come in a variety of forms, and banks and credit unions continue to offer new options. Historically, CDs came with fixed rates that didn’t change, and you always would pay a penalty if you cashed out early. But that’s not necessarily the case anymore.

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