How to Open a CD

Consider these factors when choosing a certificate of deposit (CD)

Certificates of deposit (CDs) are widely available and easy to buy. You can open a CD online in a matter of minutes or in person at your local bank or credit union. However, there are a number of things to consider during the process. In this article, we'll take you through them.

Key Takeaways

  • Opening a certificate of deposit (CD) with a bank or credit union can be quick and easy.
  • Because you'll have many CDs to choose from, it helps to decide on the type and term of the CD before you go shopping for one.
  • When you know what you want, comparison-shop for the best interest rate. Rates can vary widely from one financial institution to another.
  • Also make sure that any financial institution you're considering is federally insured, just in case.

How to Open a CD in Five Steps

Though opening a CD can be quick, you'll still want to take a little time to make sure you're getting the right one. Here are five steps to finding the perfect CD.

1. Decide on the type and term for your CD

Before you go CD shopping, it's a good idea to know exactly what you want, especially given the enormous number of choices available. The most important factors to consider when making this decision are:

  • The type of CD. CDs come in a variety of types. The standard CD has penalties for early withdrawal, for instance, whereas liquid CDs (a rarer type) don't. There are also differences in the way that interest is computed, as well as when you will receive your interest (which we cover below). You can read more about the different types in our CD Guide.
  • How long you want your CD to run. CDs can run from as little as a few months to 10 years or more. The longer you are willing to leave your money in a CD, the higher the interest rate will be. However, make sure that you are not going to need the money during the whole term of the CD. Otherwise, you will face early-withdrawal penalties that could wipe out any return on your investment.
  • Whether you'd prefer a single or joint account. You can open a CD as a joint account, just as you can with other bank accounts. Note that the Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) insurance limits $250,000 per person per institution, whereas joint accounts combine their assets up to the $250,000 limit.

If you've decided on these key factors, you can start shopping around for the CD that best suits your needs.

2. Pick a provider

When you've decided on the type and length of CD and the kind of account you want, you can look for a bank or credit union that offers it. You will likely have plenty of options. Investopedia's regularly updated list of Best Bank CD Rates, for example, is based on some 200 financial institutions that sell CDs.

There are three key factors to consider at this stage, listed here in decreasing order of importance:

  • Insurance coverage. The FDIC and NCUA insure banks and credit unions, respectively. Make sure the institution you select is covered by one or the other.
  • Interest rates. Shop around for the best interest rate. The top-paying CDs in the country typically pay three to five times the national average rate, so comparison shopping is worth the effort.
  • Early withdrawal penalties. If you need to access your money in an emergency, you'll normally have to pay a penalty. Choosing a CD with low early-withdrawal penalties could save you money in this situation. Another option, if you aren't sure when you might need your money, is simply to buy a CD with a shorter term.

Rather than a single CD, you can split your money among several CDs with different maturities. The longer-term CDs will earn a higher interest rate, while the shorter-term CDs will be more readily available if you need to cash in on one.

3. Complete your application

Having decided on the CD you want and picked a provider, you're ready to apply. The process of opening a CD is relatively straightforward. With many banks and credit unions, you can do it entirely online, though in some cases you may need to visit a physical branch.

However you apply, you'll be asked for some basic information—your address and contact details, for example. You may also have to present an ID if you don't already have an account at that financial institution.

4. Indicate how you want to receive your interest

During the sign-up process, you'll have one more important decision to make if you haven't already done so: How do you want to receive your interest? 

Many financial institutions offer two options here. You can collect all of the interest at the end of a CD's term or receive it in periodic disbursements, such as monthly or annually. If you want to maximize your total interest, opt to receive it at the end. If you'd prefer a regular cash flow from your CD, arrange for disbursements.

5. Fund the CD

Finally, you'll need to fund the CD. You'll only do this once—unlike savings accounts, CDs don't allow you to make regular deposits. You can fund your CD with an online or phone transfer from another account or by mailing a check. At the end of your CD's term, you'll also have several options for getting your money out or investing it in a new CD.

Is a CD Right for Me?

It depends. Certificates of deposit are useful in a few different situations. Perhaps you have cash you don't need now but will want within the next few years. A CD with an appropriate term would be a good way to earn a little more interest on that money while keeping it safe. CDs can also be a good choice for risk-averse investors who don't want to take a chance on more volatile investments, such as stocks.

Where Can I Get a CD?

Virtually every bank and credit union offers at least one certificate of deposit, and most have a wide array of them. So not only is your local brick-and-mortar bank an option but so is every other bank or credit union in your community. Many online banks and regular banks with an online presence also sell CDs. Still another option is buying a brokered CD through a brokerage firm or an independent sales representative.

Which CD Term Should I Choose?

That depends on how soon you need to get your money back. If you are saving for a specific goal or project, the expected start of that project can help you determine your maximum CD term. On the other hand, if you're just socking away cash for which you don't have a plan in mind, you might opt for a longer-term CD so as to maximize your interest rate.

The Bottom Line

Opening a certificate of deposit (CD) is easy, and choices are plentiful. Because interest rates can vary widely from one financial institution to another, it pays to shop around. But even before that, it's good to have a basic idea of the kind of CD you want and for how long you are comfortable having your money tied up in it.

Article Sources

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  2. Federal Deposit Insurance Corporation. "Are My Deposit Accounts Insured by the FDIC?," Select "Individual Accounts" and "Joint Accounts."

  3. FDIC. “Deposit Insurance FAQs.”

  4. Office of the Comptroller of the Currency. "What Are the Penalties for Withdrawing Money Early from a Certificate of Deposit (CD)?"

  5. Financial Industry Regulatory Authority. "Certificates of Deposit (CDs)."