CDs are worth it for some savers as rates beat standard accounts

For savers asking whether CDs are worth it, the answer depends on what the money is for and how long it can stay parked. A certificate of deposit can pay more than a regular savings or checking account, but it also asks for a trade: your cash is tied up for a set term.

A CD is a savings product offered by banks and credit unions. Customers deposit money for a specific period, and the institution pays interest, often at a fixed rate that is higher than standard deposit accounts.

Robert Donnelly, CFO of Marketplace Fairness, said CDs can make sense for some people depending on their goals and personal finances. The appeal is plain: predictable interest, lower risk and a range of terms to fit different timelines.

Are CDs worth it right now?

CDs may be worthwhile for savers who want a relatively safe return and do not need immediate access to the money. James Allen, CPA and founder of BillPin, said they can be a good fit for people seeking a safe place for cash and willing to leave it untouched for a fixed period.

The trade-off is flexibility. Allen said savers may face a fee for taking money out before the CD term ends, and they may miss out if interest rates rise after they lock in a rate.

Why CDs appeal to cautious savers

One of the main selling points is certainty. Banks typically set a fixed interest rate for the CD term, so customers know what they will earn if they leave the funds in place until maturity.

Donnelly said that certainty can help with budgeting and planning. For example, a one-year CD with a 4% annual percentage yield on a $5,000 deposit would produce $200 in interest if held for the full term.

CDs from institutions insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration are also protected up to allowed limits if the bank or credit union fails.

How CD rates compare with savings accounts

CDs often pay more than checking and traditional savings accounts. The FDIC listed the national average deposit rate for checking accounts at 0.06% as of March 8, 2023. Savings accounts averaged 0.35%, while CDs ranged from 0.18% to 1.26% depending on term.

Higher rates were available from some banks. CBS News cited Capital One’s 11-month Special CD at 5.00% APY with no minimum deposit, while its regular CD rates ranged from 3.30% to 4.10% APY. Capital One’s high-yield savings account was listed at 3.40% APY, making some of its CDs more rewarding for customers able to commit to the term.

How CD terms and ladders work

Banks and credit unions commonly offer CD terms from one month to five years or longer. That range lets savers match a CD to a known expense or future goal.

Dave Carey, CFA and founder of WealthTrace, gave the example of someone planning to buy a home in two years with a projected $40,000 down payment. He said that person may prefer a two-year CD with a guaranteed return rather than putting the money in stock or bond markets.

Another option is a CD ladder. In a traditional ladder, a saver splits money among CDs with terms from one to five years, then reinvests maturing funds that are not needed into new five-year CDs. Over time, that creates a cycle in which one CD matures each year.

What to weigh before opening one

CDs are strongest when the money has a clear timeline and the saver values safety over maximum growth. They can be less attractive if the cash may be needed soon, if rates rise after the CD is opened, or if other financial priorities come first.

Allen said savers should research the drawbacks before investing in one. High-interest debt may deserve attention before locking money into a CD, and stocks can offer higher potential returns with greater risk.

This story draws on original reporting from CBS News.