Key takeaways
- Opening a CD typically involves providing the bank with your personal information, some documentation and the funds for the new account.
- When opening a CD, you’ll need to give the bank your name, address, birth date and Social Security number. You’ll likely be asked for documentation such as a government ID.
- Before opening a CD, it’s important to compare rates. While some banks pay highly competitive APYs, others only offer paltry yields. Online-only banks commonly offer higher yields than banks with branches.
- You’ll need to fund your new CD soon after opening it. While some banks require no set minimum deposit amount, others may require $1,000 or more.
If you’re looking for a safe investment with a guaranteed return, a certificate of deposit (CD) can be a smart choice.
The best CD rates remain historically high, and the fixed nature of their rates allow you to determine up front exactly how much interest you’ll have earned by the time it matures. What’s more, locking in a CD rate can benefit you if the going rates on new CDs fall before your CD’s term is up.
Opening a CD involves choosing the right product and term, selecting a reputable bank, gathering required documentation and funding your new account. Follow these steps to open a CD and start earning more interest on your savings.
1. Choose the right CD type and term
CDs are offered in a wide variety of term lengths and types to fit different financial needs and timelines. When opening a CD, consider the following options:
Term length
CD terms can range from a few months to several years. Typically, longer terms offer higher interest rates because you’re committing your money for an extended period.
Choose a term that aligns with your savings goal, whether it’s funding a vacation in 12 months or saving for a down payment in five years. Accessing the funds sooner results in an early withdrawal penalty, which could wipe out any interest earned and potentially some of your principal.
Types of CDs
There are around a dozen types of CDs to choose from. Here are some of the more common types, which offer different levels of flexibility:
- Traditional CD: Traditional CDs earn a fixed annual percentage yield (APY) but lock funds in for a specified period. Most traditional CDs will not allow you to add more money after the initial deposit and will penalize you for early withdrawals.
- Add-on CD: An add-on CD allows you to make additional deposits during the CD term, subject to certain limits. Financial institutions currently offering add-on CDs include Bank5 Connect and BECU.
- No-penalty CD: This type of CD, sometimes called a liquid CD, lets you withdraw funds before maturity without incurring an early withdrawal penalty, though rates may be lower than traditional CDs. You can currently find no-penalty CDs from Ally Bank and Marcus by Goldman Sachs.
- Bump-up CD: Bump-up CDs are a good option in a rising rate environment, allowing you to take advantage of a higher rate for the duration of the CD term. These CDs give you the option to “bump up” to a higher rate if your bank raises rates during your term, typically limited to one or two rate increases. Banks currently offering bump-up CDs include Rising Bank and Credit One Bank.
Consider your liquidity needs, interest rate expectations and savings goals when choosing a CD type. Bankrate’s CD calculator can help you project your potential earnings across various terms and deposit amounts.
2. Shop around for the best CD rates
By doing a bit of extra research and comparing top CD rates, you’ll get rewarded with a better payout. The first step to narrowing your search is deciding whether you want to shop in person or online.
CD rates can vary widely between banks and credit unions, so it pays to compare your options. Online banks and credit unions often offer significantly higher APYs than traditional brick-and-mortar banks.
You can open a CD at an online bank from the comfort of your couch, but you’ll sacrifice the personal service that a brick-and-mortar bank can provide.
When comparing CD options, make sure look for banks that are backed by the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Share Insurance Fund (NCUSIF). This way, deposits are insured up to $250,000 per depositor, per institution.
Also, review minimum deposit requirements and early withdrawal penalties, which can vary by bank or credit union. Some institutions don’t require an opening deposit while others commonly require $1,000 (sometimes even more, as is the case for most jumbo CDs.) Similarly, a relatively standard penalty is 180 days of interest for one-year CDs, but since penalties vary widely, you’ll want to take a close look at the fine print.
Expert tip: Look beyond your primary bank for CDs
Don’t just settle for the CD rates offered by the bank where you already have a checking account. Online banks and credit unions consistently offer the highest returns, so it pays to shop around. You can easily open a CD at a different institution and link it to your existing bank account for transfers.
3. Apply for a CD
Opening a CD typically requires the same information and documentation as other bank accounts. To streamline the application process, have the following ready:
- Personal details: Name, date of birth, Social Security number or Individual Taxpayer Identification Number (ITIN), phone number, email address, and physical U.S. address
- Valid government-issued ID: Such as a driver’s license, state ID, or passport
- Funding information: Bank account and routing numbers or a check to transfer money into your new CD
Actually applying for a CD online is usually a pretty straightforward process. Many banks allow you to open CDs online, while those with branches typically also let you open them in person. Here’s how it’s done:
1. Find the CD on the bank’s website: Navigate to the bank’s CDs page and click on the “open now” or “get started” button.
2. Enter the information requested: This may include your name, birth date, phone number, email address and mailing address, as well as Social Security number and driver’s license number. In some cases, you may need to verify your identity by uploading a photo of your government-issued ID.
3. Submit the application. Once you review and accept the account agreement and disclosures, the bank will process your application and let you know whether you’re approved. Many online banks provide instant decisions, while others may take a few days to review and approve your application.
4. Fund the CD and choose when to have interest disbursed
Most banks require an initial deposit to open a CD and start earning interest. There are several ways to fund your CD:
- ACH transfer from an external bank account (typically takes 2-3 business days)
- Wire transfer (usually same-day funding but may involve a fee)
- Check deposit by mail
- Cash deposit at a branch location
When your CD is funded, you can choose how to receive your interest disbursements. Most banks offer two options:
- Reinvest the interest in your CD over time to take advantage of compound growth. With this option, you’ll earn interest on your interest over time.
- Receive interest payments via check, direct deposit into another bank account or transfer to another account. You can typically choose to receive disbursements monthly, quarterly or annually.
Consider your cash flow needs and long-term savings goals when deciding how to manage your CD’s interest payments.
Bottom line
CDs work best when you can commit to leaving your funds untouched for the full term. Before opening a CD, ensure you have enough liquid savings for emergencies and short-term expenses.
With a little bit of upfront work, a CD can help you reach your savings goals while enjoying peace of mind from FDIC or NCUA insurance and predictable returns. Explore Bankrate’s best CD rates to start growing your savings today.
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