How to Get the Best CD Rates

After years of hovering near record lows, interest rates are rising again. That’s prompted some investors to give a long-overlooked investment a fresh glance: certificates of deposit.

Certificates of deposit, or CDs, are similar to savings accounts in that you can park your money in one, risk-free, and earn interest on that deposit. One important distinction is that, with CDs, you have to agree not to touch that money for a designated time, anywhere from a few months to five years or more, depending on which product you pick. The other big difference is that the best CD rates can be higher—sometimes by a lot—than savings account rates. 

Like savings accounts, CDs offer the security of insurance from Federal Deposit Insurance Corp., says Clark Kendall, chief executive of wealth management firm Kendall Capital. “They offer the safety of principal…at a considerably higher rate of return than they did 12 months ago,” he says.

What are CD rates?

The two biggest factors that impact how much you can earn are how much money you want to put into a CD and the amount of time you’re willing to let the bank hold on to that money. Some banks have minimums—$1,000 is common—to open a CD account, while others have a much lower threshold or none at all. 

“Typically the more money you’re able to invest and the longer the term, the better the rate you’re going to get,” says Shannon Skopak, assistant vice president at Affinity Federal Credit Union. In addition, many banks offer limited-time promotional CDs with even higher rates.  

Will CD rates go up in 2022?  

In the early- and mid-1980s, it wasn’t unheard of to earn 10% on a CD, but rates have been on a long-term decline ever since, plunging drastically in the Great Recession, to the extent where returns well below 1% were the norm. But now, that’s starting to change.

While no one is predicting a return to the era of double-digit returns for CDs, the Fed’s recent series of interest rate hikes to fight inflation has created a silver lining: Rates are definitely going up. “Certificates are definitely a key investment right now,” says Shopak. They are “something people are turning to weather out the storm.”  

Depending on the bank, CD rates can vary considerably, so it’s important to shop around. “Consumers need to spend a little bit of time and due diligence,” says David Frisch, president of Frisch Financial Group.

Look at rates for CDs of the same term—say, 12 or 24 months—so you can compare apples to apples. A bank that offers the best rate on a one-year CD might not be nearly as competitive on a two-year CD, for instance. If you think you might need to access your money sooner rather than later, look for shorter-term CDs or ones that don’t charge a penalty for early withdrawal.

You can use online tools to determine which banks have the best CD rates, as well as look up or visit local banks or credit unions in your area. Check out online institutions like Ally Bank, Buy Side from WSJ’s pick for Best Online Bank. CD rates at digital banks are often higher because they have lower overhead than banks with bricks-and-mortar branches. (Although at some traditional banks like Capital One, also one of our favorites, CD rates can be surprisingly competitive, so don’t dismiss them out of hand, either.)

Also keep in mind that when it comes to CD rates, highest APY isn’t the only factor you need to consider: Look for a CD with a minimum you can afford (or no minimum at all), and figure out how long you’re comfortable having your money locked up. Also check to make sure there aren’t any monthly fees or other charges that could erode your earnings. 

CD terms you should know

There are a handful of terms you need to know in order to evaluate the best CD for your needs. 

Annual percentage yield: When you ask, what are CD rates, you’re really asking what is the annual percentage yield. Often abbreviated to APY, this is the rate of return you’ll earn on your money, taking compounding into effect. 

Early withdrawal penalty: Most CDs penalize you if you want to withdraw your money before the maturity date. This might be a flat fee, although most typically the penalty fee is a percentage of the accrued interest, all the way up to 100%. For shorter-term CDs in particular, it’s not uncommon to have to forfeit all of the interest.

Flexible-rate CD: CD rates are fixed, but some banks offer CDs that give you a one-time opportunity to raise your APY if interest rates have risen significantly since you opened the account. 

IRA CD: Ordinary CDs are funded with money you have already paid taxes on, and the interest you earn is subject to federal and state income tax. Many banks also offer individual retirement accounts where the funds are invested in CDs. There are both traditional IRA CDs and Roth IRA CDs, governed by the same IRS regulations as IRAs invested in other types of assets.

Laddering: Laddering CDs is a strategy in which you take the total sum of money you want to put in CDs, split it into equal amounts and put each into a CD with a different maturity date. For instance, if you want to put $3,000 into CDs using laddering, you could put $1,000 into a three-month CD, $1,000 into a six-month CD and the remaining $1,000 into a one-year CD. When those CDs mature, you can roll them into new ones that retain a staggered maturity schedule.

Maturity date: The term of a CD refers to how long you’ll need to keep your money locked up (such a as three months, or a year.) The maturity date is when that term ends. At that point, you can reclaim your money—and collect the accrued interest it has earned. CDs come in a wide range of maturities. Some terms are as short as a month (although returns are often so low that you’d be better off just parking your money in a high-yield savings account), while others stretch as long as a decade.

No-penalty CD: These CDs usually have somewhat lower APYs, but they waive the early withdrawal penalty and let you keep the interest that has accrued. 

Share certificate: This is banking legalese that indicates the certificate is offered by a credit union (which is a nonprofit institution, as opposed to a for-profit bank) and insured by the Credit Union National Association rather than the Federal Deposit Insurance Corp. From your point of view as a saver, whether you have a share certificate versus a CD doesn’t really make a difference.

How to use CDs in your portfolio

CDs are a good tool to have in your money-management tool kit, especially if you use laddering. As a rule of thumb, personal finance experts suggest having six months’ worth of living expenses in savings as an emergency fund, but savings accounts often earn minimal interest. CDs have better returns, but an emergency fund won’t help you if it’s tied up in a CD that doesn’t mature for months. Staggering the maturity dates at intervals via CD laddering ensures that you will always have some of your savings available to you within a short period of time. 

“With this laddering concept, you don’t necessarily need six months of expenses [because] you don’t need all the money at the same time,” Frisch says. You should keep enough money in a savings account—you can search for a high-yield savings account to maximize the amount of interest you can earn—to cover the period of time until your next CD matures. 

You’re likely to forfeit a slightly higher APY than you can earn with a single, larger CD and a longer-duration maturity date, but that difference will almost certainly be smaller than the amount of an early-withdrawal penalty. “You’re giving up some yield but getting the flexibility,” Frisch says.

Trying to capture the absolute highest CD rate is kind of like trying to time the stock market—in other words, almost impossible to get right. Similar to how dollar-cost averaging can help you accrue gains while mitigating risk, having a CD maturing every month or two puts you in a good place to capture further increases in interest rates. 

Laddering is a good strategy to employ if you’re wondering whether CD rates are going up and want a safe place to park your dollars, Skopak says. “In economic times like this, it’s definitely a good place to shelter the storm, and make sure you can take advantage of the interest rates that are out there.”