How to find the best CD rates
Average interest rates on CDs have been trending upward at financial institutions across the country. The most savvy consumers know that if you take the time to do your research, you can often find deals that are much better than average.
The guide below will help you review the basics of how CDs work and provide you with tips on how to find the best CD rates today. You’ll also learn about how the Federal Reserve affects CD rates, current CD rate trends, and the details you should consider when choosing a CD beyond just the interest rate a bank or credit union offers you.
How CDs work
A certificate of deposit, called a CD for short, is a special type of interest-bearing account you can open by depositing a lump sum with a traditional bank, credit union, or online bank. Credit unions call CDs share certificates.
A certificate of deposit usually has a fixed interest rate that’s higher than other types of deposit accounts such as savings accounts, high-yield savings accounts, and money market accounts. In exchange for this more competitive, fixed annual percentage yield (APY), you must agree to leave your cash in the account for a set period of time, called the CD’s term.
If you decide to withdraw funds from a CD before the end of its term, your bank will usually charge you an early withdrawal penalty. An early withdrawal penalty could offset some or all of the interest you earn on a CD. In some cases, you could even lose some of your initial deposit. Therefore, it’s important to be strategic about your savings options and only lock up money in a CD that you’re confident you won’t need to access until the account matures.
CD rates today
The average interest rate on a one-year CD was 1.59% as of May 15, 2023, according to the Federal Deposit Insurance Corp. That’s about 10 times the average APY on one-year CDs a year ago.
However, today’s best CD rates far exceed the national average. When you shop around and compare rates from different banks, it’s possible to find one-year CD interest rates that more than triple the national average.
Shopping for the best CD rates by term
The term of your CD — the length of time it takes your CD to mature — can also affect the interest rate a bank offers you. In general, long-term CDs are thought to feature higher APYs as a benefit of letting the bank hold onto your cash for a longer period. But longer terms don’t always equal higher interest rates with CD investing.
In the current market, it’s true that average interest rates increase between one-month and one-year CDs as detailed below.
Yet, at the moment, that upward interest rate trend isn't consistent with all longer-term CDs. Here’s a look at average CD interest rates for two-year CDs to five-year CDs.
As you can see, the best CD rates today aren’t necessarily tied to accounts with the longest terms.
Are CD rates going up?
In early May 2023, the Federal Reserve voted to raise the federal funds rate to 5%-5.25%.
The federal funds rate is a target interest rate range that US banks charge one another to borrow excess reserves overnight. This rate influences both the interest rates that consumers pay when they borrow money and the rates that banks pay to their customers on deposit accounts like CDs, savings accounts, and others.
When the Fed increases the federal funds rate, rates on CDs and other banking products tend to increase too. So it would not be unusual to see further CD rate increases following this latest Federal Reserve rate hike. Meanwhile, some financial institutions, including online banks, raised their interest rates on some CD products in the aftermath of the failure of Silicon Valley Bank to try to hold on to more customers.
The Fed has been raising rates over the past year to bring inflation under control. Inflation has moderated in recent months but remains above the Fed's target level of 2%. While no one can predict the future, more interest rate increases might be in store. If the Fed decides to raise interest rates again, CD rates could continue to increase.
Savers may worry about locking their money into a CD and missing out on higher interest rates down the road. And in an environment where interest rates are rising, as they have been lately, that’s a real possibility.
CD laddering and no-penalty CDs can help you avoid the risk of missing out on higher CD rates later. Here’s a brief summary of these two options.
No-penalty CDs: This type of CD gives you the option to withdraw funds from your account before the maturity date without paying a penalty. As a trade-off for this flexibility, however, banks tend to offer lower APYs for this type of account.
CD ladder: With a CD ladder, you split your savings among multiple CDs with staggered maturity dates (e.g., a 6-month CD, a 12-month CD, and an 18-month CD). When the first CD in your ladder matures, you can access those funds if you need them or roll the cash into a new CD — perhaps at a higher APY if one is available at that time. Of course, no one knows the future. So there’s always a risk that APYs could start trending downward as well.
No-penalty CDs: This type of CD gives you the option to withdraw funds from your account before the maturity date without paying a penalty. As a trade-off for this flexibility, however, banks tend to offer lower APYs for this type of account.
CD ladder: With a CD ladder, you split your savings among multiple CDs with staggered maturity dates (e.g., a 6-month CD, a 12-month CD, and an 18-month CD). When the first CD in your ladder matures, you can access those funds if you need them or roll the cash into a new CD — perhaps at a higher APY if one is available at that time. Of course, no one knows the future. So there’s always a risk that APYs could start trending downward as well.
Other details that matter when choosing a CD
If you’re considering CD investing, you should search for the best possible APY. But that isn’t the only detail that matters when it comes to choosing the right account.
Here are some other things to consider when choosing a CD.
Find the right term. Make sure you choose a CD term that fits your savings goals. That will lower the chance you'll need to pull money from the account before its term ends and trigger a penalty.
Look for FDIC insurance. It’s important to open a CD with a bank that’s insured by the Federal Deposit Insurance Corp. If you’re opening a share certificate, pick a credit union that’s insured by the National Credit Union Administration. Federal deposit insurance will cover you for up to $250,000 (per depositor, per account ownership category).
Check the early withdrawal penalty. You should aim to avoid taking your money out of a CD before it matures. But it’s wise to know what would happen if you have to access your cash early.
Find the right term. Make sure you choose a CD term that fits your savings goals. That will lower the chance you'll need to pull money from the account before its term ends and trigger a penalty.
Look for FDIC insurance. It’s important to open a CD with a bank that’s insured by the Federal Deposit Insurance Corp. If you’re opening a share certificate, pick a credit union that’s insured by the National Credit Union Administration. Federal deposit insurance will cover you for up to $250,000 (per depositor, per account ownership category).
Check the early withdrawal penalty. You should aim to avoid taking your money out of a CD before it matures. But it’s wise to know what would happen if you have to access your cash early.
