CDs vs. High-Yield Savings: What’s the Difference If They Both Offer Competitive Rates

Certificates of deposit (CDs) and high-yield savings accounts are generally a great place to store excess cash while earning more with higher-than-average interest rates. But what truly differentiates the two is how the interest rate is set and the accessibility of your cash.

What is a CD?

A CD is a low-risk account that offers generally higher interest rates than your average savings account. CDs have a fixed-term length, fixed-term rate, and fixed withdrawal date that typically have minimum and maximum amounts required to open an account

However, the key word to remember when opening a CD is fixed. You lock in a CD with a fixed rate and earn back not only your principal but also the interest you earn at that rate. However, to avoid being dinged with an early withdrawal penalty, it’s advised to keep your funds in your CD until it reaches its fixed date of withdrawal.

Note: There are different types of CDs aside from fixed-rate CDs. Other types may offer variable rates, the ability to add funds, the possibility to bump up the rate, or no penalties.

Why and when should you open a CD?

A CD is great if you’re saving for a down payment on a house, looking to buy a new car, or just want to earn a higher, guaranteed interest rate on funds you don’t need access to. CDs allow you to store your money if you have no immediate need for it. They are not only low-risk but a way for you to earn more — especially with today’s higher rates— while you save. They provide you with a predictable rate of return until your CD reaches its maturity date.

What is a high-yield savings account (HYSA)?

High-yield savings accounts allow you to earn more with higher interest rates and Annual Percentage Yield (APY). The APY includes the compounding interest – the interest earned on interest you’ve received on your principal amount to date. However, the difference between a HYSA account and a CD is that the APY can fluctuate at any time, vs. being fixed for a fixed amount of time. HYSA rates rise and fall based on the Federal Reserve changing its benchmark interest rate at any given time.  

Why and when should you open a HYSA?

HYSAs offer higher interest rates than traditional savings accounts and allow you to deposit and generally withdraw money at any time. They are a great place for your emergency funds or your safety net for unexpected expenses. But being able to save more in a HYSA and having quick access to funds when it’s least expected is even more helpful. 

The Pros and Cons of CDs vs. High-Yield Savings Accounts

CDHigh-Yield Savings Account
ProsPros
-FDIC & NCUA-Insured
-Generally, offers a higher fixed APY than savings and high-yield savings accounts
-Fixed APY allows you to lock in a predictable rate of return.
-FDIC & NCUA-Insured
-Typically, offers a higher variable APY vs. traditional savings accounts
-Generally able to deposit and withdraw money at any time  
ConsCons
-Incur penalty for withdrawing funds prior to maturity date (unless it’s a no-penalty CD)
-Cannot add funds after opening CD
-Funds are not accessible without penalty prior to maturity.
-Rates fluctuate based on the Federal Reserve Benchmark.
-Rates are usually a little lower than CD rates
-Possible limit on monthly withdrawals (depends on the financial institution)
-May have a higher minimum balance requirement

How do I choose between the two?

Both CDs and HYSAs are safe, low-risk, and offer generally higher than average interest rates when you’re trying to reach your short or long-term financial goals. But choosing between the two will all depend on what features best fit your savings needs, the timeline you’d like to achieve your goals, and most importantly, how soon you will need access to your funds. 

FAQs

What is a CD?

A CD is a low-risk account that generally offers higher interest rates than your traditional savings account. CDs have a fixed-term length, fixed-term rate, and fixed withdrawal date that typically have minimum and maximum amounts required to open.

What is a high-yield savings account (HYSA)?

A high-yield savings account allows you to earn more with higher interest rates and Annual Percentage Yield (APY). However, the APY – which includes compounding interest — can fluctuate based on the Federal Reserve changing its benchmark interest rate at any given time.

Where can I find the best CD rates?

The best CD rates today can be found at CD Valet. Get the best returns on your investment with our CD marketplace from thousands of Financial Institutions in the US. 

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