How Do CDs Work? | Banking Basics 101

In this article, we’re going to answer “How do CDs work?”

Not surprisingly, this is an important question for anyone getting started with saving, investing, or banking in the United States.

This article is part of our series on banking basics, ranging from opening different types of bank accounts around the world to understanding how various aspects of the banking system operate.

Feel free to use the table of contents to jump ahead to the sections most relevant to you.

Table of Contents

1. How Do CDs Work?
2. Who Can Open a CD Account?
3. What Are the Types of CDs and How Do They Work?
4. Benefits of Certificate of Deposit
5. How to Open a CD Account
6. Frequently Asked Questions
7. Do You Want Help Opening Bank Accounts?

How Do CDs Work?

CDs (Certificate of Deposit) are term deposits with fixed maturity dates that are available when banking in the United States. Banking institutions offer CDs to encourage savings and investment.

Of course, one of the main CD benefits that attract depositors is higher interest rates than they can receive on standard deposit accounts. In fact, on a risk-reward basis, fixed-rate CDs may offer a more attractive profile than a wide range of financial products.

That said, before deciding on a CD there are other factors to consider as well. For example, CDs have withdrawal penalties for early withdrawal. And, depending on the specific bank and CD you are considering, there are usually requirements for the principal amount.

CD Account vs Savings Account

The main difference between a CD account and a savings account is that a CD account offers higher returns and requires a fixed deposit while savings bank accounts typically offer lower returns and usually allow for all or most of the balance to be withdrawn at any time.

Who Can Open a CD Account?

A CD account can be opened by any individual who meets the criteria to open an account, which includes any person over the legal age in the jurisdiction. In most jurisdictions, this means any person over 18 years of age.

That said, individuals are not the only ones who can open CD accounts. Businesses, corporations, trusts, IRAs, and other legal entities are also entitled to open CD accounts. Here is a closer look at who can open a CD account.

• Individuals of legal age (18 years old)
• Business entities
• Corporations
• Trusts and foundations
• Individual Retirement Accounts (IRAs)
• And more

What Are the Types of CDs and How Do They Work?

There is a wide range of CDs to choose from, including low minimum standard CDs to jumbo CDs, as well as foreign currency CDs. With this in mind, here is a list of some of the most popular CDs to consider.

• Standard CD
• High-yield CD
• Jumbo CD
• No-penalty CD
• IRA CD
• Bump-up CD
• Add-on CD
• Brokered CD

Benefits of Certificate of Deposits (CDs)

Depending on the type of CD you choose, there is a wide range of benefits that you will be able to extract. These benefits range from accessing a low-risk investment to securing guaranteed returns and more. With this in mind, here is a look at some of the key benefits that attract people to CDs in the first place.

• Low-risk investment opportunity
• Guaranteed returns
• Higher interest than offered on standard savings accounts
• Fixed term with a clear end date
• Deposit insurance
• Protects investments from market fluctuations
• Encourages savings

How to Open a CD Account

To open a CD account, an individual will need to make a qualifying deposit with the offering bank or financial institution. During this period, the term of the CD will also be agreed, ending on the maturity date. After the maturity date, the depositor will be able to reclaim their principal deposit and the interest earned.

Does a CD Account Earn Interest Rates Monthly?

Generally speaking, a CD account earns interest at the maturity date. In other words, interest starts accruing from the moment the principal balance is deposited into the account. But, that interest is not paid until the maturity date arrives.

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Frequently Asked Questions

Below are a few of the most common questions we receive from people looking into how CDs work in banking. If you have further questions you would like to ask our team, don’t hesitate to get in touch.

Are CDs Different From Regular Bank Accounts?

Yes, CDs are different from a regular bank account in a number of key ways, including the interest rate that they pay, the length of time that they have to stay in the account, and the ongoing access to the funds deposited.

What Is a Disadvantage of a Certificate of Deposit?

One of the main disadvantages of a certificate of deposit is that the money needs to remain in the account until the maturity date. After the maturity date, the funds can be accessed again. If the funds are accessed prior to the maturity date, then an early withdrawal penalty is charged.

Do CDs Earn Interest Monthly?

No, CDs typically earn interest at the end of the fixed term, which means the interest on a CD is only paid at the maturity date.

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