CD rates change weekly, and what you earn depends on how long you lock your money away

A certificate of deposit (CD) pays you a fixed interest rate for agreeing to leave your money in the account for a set period — usually three months to five years. The longer you commit, the higher the rate. Right now, rates vary widely: some banks pay around 4% annually on a one-year CD, while others pay 5% or more. The exact amount you'll earn depends on three things: which bank you choose, how long you lock the money in, and when you open the account.

Banks set CD rates based on what the Federal Reserve does with its benchmark interest rate. When the Fed raises rates, banks raise CD rates too — usually within days or weeks. When the Fed cuts rates, CD rates fall. This means the rate you see today might be different next week. The rate you lock in on the day you open the CD is the rate you keep for the entire term, even if rates drop later.

Key Takeaways

  • CD rates vary by bank and by term length, ranging from around 4% to 5.5% annually depending on current market conditions and your bank's pricing.
  • The longer you agree to lock your money away, the higher the rate the bank will pay you, though the difference between a one-year and five-year CD may only be 0.5% to 1%.
  • Online banks typically pay higher rates than brick-and-mortar banks because they have lower overhead costs.
  • The rate you lock in when you open the CD stays the same for the entire term, so timing matters if rates are falling.
  • Your CD is insured up to $250,000 by the FDIC, so the bank's safety does not affect how much you earn.

How term length affects what you earn

Banks pay more for longer commitments because they want to keep your money longer. A three-month CD might pay 4.5% annually, while a one-year CD at the same bank might pay 4.8%, and a five-year CD might pay 5.2%. The difference is usually small — often less than 1% — but it adds up over time.

The catch is that you cannot touch the money without a penalty. If you need the cash before the term ends, the bank will subtract an early withdrawal penalty from your balance. That penalty might erase all the interest you earned, or more. A three-month CD has a smaller penalty than a five-year CD, which is one reason some people choose shorter terms even though the rate is lower.

Why online banks pay more than traditional banks

Online banks — like Marcus, Ally, and American Express Bank — typically pay 0.5% to 1% more than banks with physical branches. A brick-and-mortar bank might pay 4.5% on a one-year CD, while an online bank pays 5.2% for the same term. The difference is real money: on a $10,000 CD, that extra 0.7% means $70 more per year.

Online banks can pay more because they do not have the cost of running branches, paying tellers, or maintaining office space. They pass those savings to customers through higher rates. The trade-off is that you cannot walk into a branch to ask questions — you handle everything by phone, email, or their website. Your money is still insured the same way, and the bank is still regulated the same way.

What happens when your CD matures

When your term ends, the bank moves your CD into a grace period — usually seven to ten days. During that time, you can withdraw your money without penalty, or you can let the bank automatically roll it into a new CD at whatever the current rate is. Many people miss this window and end up in a new CD at a lower rate without meaning to.

The best practice is to set a calendar reminder for a few days before your maturity date. Then you can decide: take the money out, move it to a different bank if rates have risen, or renew at your current bank if the new rate is competitive. Some banks will let you shop around during the grace period and then decide, while others require you to act quickly.

How to compare rates across banks

CD rates change constantly, so comparing by phone or in person is less reliable than checking online. Websites like Bankrate, DepositAccounts, and the Federal Reserve's own rate tracker show what different banks are paying on the same day. You can filter by term length and see which banks are paying the most for a three-month, one-year, or five-year CD.

When you compare, look at the annual percentage yield (APY), not just the interest rate. APY includes the effect of compounding — how often the bank adds interest to your balance — so it is the true number to use. A bank advertising a 5% rate might actually pay 5.12% APY if interest compounds daily. The difference is small on short terms but matters on longer ones.

Special CDs that pay more or less

Some banks offer bump-up CDs or raise-your-rate CDs, which let you increase your rate once if rates rise during your term. These usually start at a slightly lower rate than a regular CD — maybe 4.9% instead of 5.1% — because you have the option to move up. If rates fall, you keep your original rate. If rates rise, you can bump up once, usually within 30 days of the rate change.

Other banks offer no-penalty CDs, which let you withdraw your money early without losing interest. These pay less than regular CDs — maybe 4.5% instead of 5.2% — because the bank is taking on more risk. They make sense if you think you might need the money but want a higher rate than a savings account.

How much interest you actually earn

The amount you earn is straightforward math: your balance times the APY times the number of years. A $10,000 CD at 5% APY for one year earns $500. A $10,000 CD at 5% APY for five years earns $2,500 total (not $500 per year, because interest compounds). Most banks show you the exact dollar amount you will earn before you open the account.

The real question is whether a CD makes sense for you. If you have money you will not need for one to five years, a CD locks in a may provide rate and is safer than the stock market. If you might need the money sooner, the early withdrawal penalty could wipe out your gains. If you think rates will rise soon, a shorter term lets you reinvest at a higher rate when it matures.

Frequently Asked Questions

Can I open a CD with a small amount of money?

Most banks require a minimum deposit of $500 to $2,500 to open a CD, though some online banks have no minimum. Check the bank's website or call to confirm before you explore. The rate you get does not change based on how much you deposit — a $500 CD earns the same percentage as a $50,000 CD at the same bank.

What if I need my money before the CD matures?

You can withdraw it, but the bank will charge an early withdrawal penalty. The penalty varies by bank and term length — it might be three months of interest, or a percentage of your balance. Calculate whether you will have enough left after the penalty before you withdraw. Some banks let you withdraw a small amount without penalty, so ask first.

Is my money safe in a CD?

Yes, up to $250,000 per bank. The FDIC insures CDs the same way it insures savings accounts. If the bank fails, the government reimburses you. The rate the bank pays does not affect your safety — a bank paying 5.5% is just as safe as one paying 4%.

Do I have to pay taxes on CD interest?

Yes. The interest you earn is taxable income in the year you earn it, even if you do not withdraw the money. The bank will send you a 1099-INT form at tax time showing how much interest you earned. If you are in a high tax bracket, the after-tax return on a CD might be lower than you expect.

What happens if rates drop after I open my CD?

Your rate stays the same for the entire term. You keep earning whatever percentage you locked in, even if the bank is paying less to new customers. This is one advantage of CDs — you are protected from falling rates. The downside is that if rates rise, you are stuck at your original rate unless you have a bump-up CD.