What is a CD?

What we’ll cover:

  • An overview of certificates of deposit (CDs) and how they can boost your savings
  • The different types of CDs including high-yield and no-penalty
  • Other strategies to consider if you’re thinking about opening a CD

Not to be confused with the CDs you used to burn music onto, the CD (certificate of deposit) we’re referring to is a type of savings account.

A certificate of deposit is a savings account that typically has higher interest rates than a traditional savings account, and a fixed withdrawal or maturity date.

The trade-off for the higher interest rate is that your cash is less accessible. You agree to leave your money deposited at a fixed rate for a set amount of time, called the CD term. If you withdraw your money before the CD term ends, you could pay a penalty, though there are a few ways to avoid paying for early withdrawal. 

Generally, a CD with a longer term will have a higher interest rate. Because the interest rate on a CD, expressed as an annual percentage yield (APY), is typically a fixed rate, it won’t change over the length of your CD term.

If the APY offered by your current bank seems low, you could be able to find a better rate online

Opening a CD could be a smart option if you are confident that you won’t need the money during the term. You can see how much your money could grow with Marcus by using our High-Yield CD Calculator

CDs are considered safe accounts since they are typically FDIC-insured up to the maximum allowed by law.

What are the types of CDs?

Because certificates of deposit vary in type and length, it’s important to choose the one that’s right for you. There are several types of CDs offered by financial institutions, which are covered below. 

High-yield CD

As it sounds, a high-yield CD gives you a higher interest rate compared to a traditional CD. Of course, this could come with conditions. You may have to either put in more money upfront or store your money for longer in order to earn a higher interest rate.

The interest rate on your CD will also depend on the bank you choose. Online providers, like Marcus by Goldman Sachs, are often able to offer more competitive high-yield CD rates because they don’t have the same costs of a traditional brick-and-mortar shop.

No-penalty CD

A no-penalty CD differs from a typical CD account because it allows you to withdraw your money after a certain date, without paying a penalty. As with a Marcus No-Penalty CD, the tradeoff for that convenience is that your interest rate will likely be lower than it is on a typical CD account, but it could still be higher than the interest rate on savings accounts

While a no-penalty CD allows for the flexibility of withdrawing your funds, you typically need to withdraw the full amount. For Marcus, you can withdraw your money beginning seven days after funding, but you must withdraw the full amount.  

Bump-up CD

With a bump-up CD, you have the ability to take advantage of increasing interest rates. When interest rates increase, this type of CD gives you the option to direct the bank to change your interest rate (usually only once) to the current, higher rate offered, for the remainder of your term.

The downside of this type of account is that the initial interest rate offered may be lower than that of typical CDs.

Step-up CD

Step up CDs are similar to bump-up CDs, except the interest rate on your CD automatically adjusts to a predetermined amount at a set time(s).

Zero coupon CD

A zero coupon CD is a CD purchased at a lower cost than the face value of that CD. With a zero coupon CD, you won’t receive any periodic interest payments over the life of the CD. Instead, you’ll receive the face value of the CD when it matures in the future, which will include the accrued interest.

For example, let’s say you paid $80,000 for a 10-year, $100,000 zero coupon CD. You won’t receive any interest on this CD during the 10 year term, but you’ll get the full value of $100,000 at the end of the 10 years (accounting for the interest you waited to receive).

A downside to this type of CD?  Even though you’re not receiving your interest payments, you’ll still be taxed annually on the accrued interest since the interest is treated as taxable income.

Next steps

If you think a certificate of deposit could be right for you, look at different options. If the APY offered by your current bank seems low, you could be able to find a better rate online. If you’re interested in going the extra mile, you could consider a CD ladder to maximize your savings. 

One last thing: be sure that you really understand the terms of your CD. Asking questions and doing research will help ensure you’re making the right choice.

See how much interest you could earn with a CD from Marcus

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.