Certificates of Deposit (CDs) are one of the most straightforward ways to grow your savings. They offer a fixed rate that won’t change with predictable interest, and they carry very low risk when held through insured banks and credit unions. Savvy shoppers already know how to spot a great CD rate—but the rate alone doesn’t tell the whole story.
To get the most out of your CD, you’ll want to look closely at the fine print. Understanding how penalties work, how interest is paid, and what happens when your CD matures will help ensure you’re choosing the best account for your savings goals.
Here are three key factors to weigh the next time you’re shopping for a CD.
1. Understand the Penalties
Every CD comes with an early withdrawal penalty. The standard is usually:
- 90 days of interest lost if you withdraw prior to maturity on a 12-month or shorter CD term
- 180 days of interest lost if you withdraw from a CD with a term longer than 12 months
But not all penalties are created equal. Some banks and credit unions may impose harsher terms, including the possibility of dipping into your principal. That means you could lose part of your original deposit—not just the interest earned—if you need access to your funds before maturity.
When comparing CDs with similar rates, penalties can be the deciding factor. Think of them as the “insurance policy” that protects your flexibility in case life doesn’t go according to plan.
Want to see how a penalty could affect your savings? Try our Break-Free Calculator.
2. Know How Interest Is Paid
Another overlooked detail is how the bank or credit union pays out your CD interest.
- Most CDs pay interest quarterly and allow penalty-free withdrawals of the posted interest.
- Some offer monthly interest payments, which can be useful for retirees or anyone looking to supplement their income.
- And a few CDs pay interest upon maturity.
Just remember: if you’re taking out the interest as it’s paid, you won’t get the full Annual Percentage Yield (APY), since the power of compounding is reduced. That trade-off might be worth it if consistent income is your priority—but it’s important to factor in before you choose.
Curious how compounding grows your money? Run the numbers with our Earnings Calculator.
3. Check What Happens at Maturity
It’s easy to forget about a CD once it’s opened—but what happens at the end of its term can have a big impact on your savings.
- Auto-renewal: Most CDs roll over into a new term automatically at the then posted interest rate. This can result in a higher or lower interest rate than your initial term. If your CD was a promotional offer, you could also end up with a different CD term than your original term as many promotional CDs offer terms outside of the standard terms such as a 7-month or 11-month but auto-renew into standard terms such as a 6-month or 12-month.
- Auto-close: Some CDs simply close at maturity, returning your funds.
- Grace period: By law, banks and credit unions must mail you a notice before maturity. You typically have 10 calendar days after maturity to make a decision: renew, change terms, add a deposit, withdraw or close. Take note, that some CDs may not pay interest during the grace period if you withdraw funds or close the CD.
Staying on top of your CD’s maturity date helps you avoid surprises—and missed opportunities. CD Valet can send you reminders and rate alerts so you never miss your window to act.
Final Takeaway
When it comes to shopping for CDs, the best rate is only part of the equation. By digging into the details—penalties, payout structure, and maturity terms—you’ll be able to choose a CD that not only grows your money but also fits seamlessly with your financial goals.
Take the time to look past the rate, and you’ll end up with a CD that truly works for you.
FAQs
Could I really lose my principal if I withdraw early?
Yes, in some cases. While the standard penalty is forfeited interest (90 or 180 days), certain CDs may dip into your principal if you withdraw too soon. Always check the disclosure before committing.
Can I receive my CD interest as income?
Yes. Many banks and credit unions allow monthly or quarterly payouts of earned interest, penalty-free. Just keep in mind that withdrawing interest reduces your total APY since the funds won’t compound.
What should I do when my CD matures?
Review your options during the 10-day grace period. Compare current rates, decide if you want to reinvest, or move the funds elsewhere. This ensures you stay in control of your savings strategy.
