How to Open 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 almost any bank or at your credit union. However, there are a number of things to consider before you commit.

Key Takeaways

  • Opening a certificate of deposit (CD) with a bank or credit union can be quick and easy.
  • You’ll have many CDs to choose from. It helps to decide on the type and term of the CD before you commit your money.
  • When you know what you want, comparison-shop for the best interest rate. Rates vary widely from one bank to another.
  • Almost all banks and credit unions are covered by federal deposit insurance but double-check to make sure.

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

The most important factors to consider when making this decision are:

  • The type of CD. A standard CD has penalties for early withdrawal, 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. You can read more about the various types in our CD Guide.
  • How Long Your CD Will Run. CDs can have terms that 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. Make sure you’re not turning over any money you may need during the term. The early-withdrawal penalties could wipe out any return on your investment.
  • 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 covers up to $250,000 per person per institution. The combined coverage for a joint account is $500,000.

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 have plenty of options. Investopedia’s regularly updated list of Best Bank CD Rates 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. Almost all U.S. bank account deposits, including CDs, are insured by the Federal Deposit Insurance Corp. (FDIC), while credit union deposits are insured by the National Credit Union Administration. (NCUA). 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 nationwide can pay three to five times the national average, so comparison shopping is well worth the effort.
  • Early withdrawal penalties. If you need to access your money in an emergency, you’ll pay a penalty. Choosing a CD with low early-withdrawal penalties could save you money. A better option, if you aren’t sure whether you can spare the money, is simply to buy a CD with a shorter term. You can always roll it over into a new CD when it expires.

Consider splitting 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 in case of need.

3. Complete the Application

Having decided on the CD you want and picked a provider, you’re ready to apply. The process of opening a CD is straightforward. With many banks and credit unions, you can do it entirely online.

However you apply, you’ll be asked for some basic information—your address and contact details, for example. You may have to show 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 generally don’t allow you to make additional 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 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 a year or a 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 also are 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.

Most 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, you might opt for a longer-term CD 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.