Background
Certificates of deposit are considered especially safe investments—but they don’t offer as much growth potential as alternatives, like stocks and bonds.
A CD is technically a type of savings account. However, the two offerings differ in a few key ways.
For instance, CDs typically offer higher interest rates. But there’s a trade-off: Unlike normal savings accounts, CDs hold a fixed amount of money for a fixed term. That means you cannot withdraw cash without penalty until the end of the CD’s term, when you can withdraw your original investment plus its interest.
How It Works
The bank or credit union where you open your CD sets terms (like early withdrawal penalties) for your CD. CDs come in varying term lengths, from three- or six-month commitments to decadelong terms. Typically, the longer the term, the higher the interest rate.
Variable-rate CDs fluctuate and are tied to a specific benchmark, like the Federal Reserve’s rate, or a market index, like the S&P 500. Fixed-rate CDs have stable interest rates, so you’ll know exactly how much you will earn by the end of the term.
If a bank needs more deposits to fund loans, it may offer high interest rates to attract deposits. Alternatively, a large bank with sufficient deposit reserves may have less incentive to grow its CD portfolio, offering lower rates as a result.
Periodically, the Federal Open Market Committee decides whether to raise, hold, or lower the federal funds rate—the interest rate at which banks lend their excess funds through the Fed. This influences what banks are willing to pay consumers for their deposits in savings and CD accounts. Typically, the higher the federal funds rate, the higher the interest rates on CDs.
History
The concept of CDs dates back to the 1600s in Europe. Banks in the US started issuing CDs in the early 1800s as the banking system began to take shape following the Revolutionary War.
The federal government did not formally insure CDs until the Federal Deposit Insurance Corporation was formed in 1933 to restore trust in the American banking system amid the Great Depression.
Average three-month CD rates reached a historical high of 18.65% in December 1980. Comparatively, average three-month CD rates reached a low of 0.09% in June 2021 amid the economic turmoil of the COVID-19 pandemic. When inflation began to rise in 2022, the Fed began initiating rate hikes to incentivize saving.
Today's CDs
The average three-month CD rate, as of August 2024, was around 5.5%. This is higher than much of the past decade, but nothing like the double-digit interest rates of the 1980s.
As of August 2024, a CD purchased via a federally insured bank is insured up to $250K. You can learn how to find an FDIC-insured institution through services like BankFind, or by contacting the FDIC’s call center.
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