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A CD rate is the annualized yield offered by a bank or credit union on a certificate of deposit. Generally, the CD rate offered by an institution will exceed the yield offered on its other savings vehicles, but a CD is subject to a lockup period during which you cannot touch your money without facing an early withdrawal penalty.

Put simply, a CD rate is the interest rate on a certificate of deposit. CD rates typically run higher than the rates on traditional savings because CDs require you to leave your money untouched for a set period while your savings grow.

Beyond this requirement, a variety of terms, conditions and marketplace factors can influence a CD rate. Be sure to familiarize yourself with these variables and diligently shop for the top rates nationally if you’re in the market for a certificate of deposit.

A CD rate is most often expressed and marketed as an annual percentage yield (APY), or effective annual rate, which reflects the effect of compound interest. For a hypothetical two-year CD, offering a nominal rate of 2.5 percent, compounded daily, the APY is as follows:

APY Formula for a Hypothetical Two-Year CD

How Are CD Rates Determined?

CD rates are largely influenced by the Federal Reserve’s monetary policy actions and the resulting position of the federal funds rate, which is the overnight rate at which banks lend and borrow funds from each other.

When the Fed acts to put upward or downward pressure on the federal funds rate, banks and credit unions generally respond by moving their savings, money market account and CD yields in the same direction.
There is always the possibility for deviation from the federal funds rate, and this occurs whenever a bank or credit union seeks to modify its competitive stance in the market.

What Is a “No-Penalty” CD Rate?

CD rates are also influenced by any variations from the traditional product structure. The most well-known variation is the no-penalty CD. This structure allows for penalty-free early withdrawal, but typically requires the sacrifice of some yield. Three other fairly common alternative structures are jumbo CD, bump-up CD and step-up CD.

How Much Do CDs Pay?

As of August 2021 — with the federal funds target at zero to 0.25 percent — national CD averages range from 0.03 percent (one-month term) to 0.26 percent (five-year term), according to the Federal Deposit Insurance Corporation. This isn’t expected to change much in the foreseeable future.

What Makes for a “Good” CD Rate?

The national average of comparable CD rates is a sound starting point for determining a “good” CD rate. However, attaining the average is not a winning objective.

Rather, you should strive to garner the top available rate, which tends to be far superior to the average. In fact, top-paying institutions regularly offer a yield five to six times higher than the national average. This holds fairly firm through varying interest rate environments and across key maturity spectrums.

In most instances, especially for longer-term CDs, the rates available on the best-paying CDs are usually in line with inflation. Any CD yielding more is rare. Unfortunately, ever since the Great Recession, CD rates have been meager.

How to Maximize Your CD Rate

Awareness is the key to garnering the best possible CD rate. Make the most of your CD and grow your savings by following these steps.

  • Diligently shop for the top rates nationally.
  • Be cognizant of CD terms, particularly early withdrawal penalties and compounding frequencies. A high withdrawal penalty is to be frowned upon, while more frequent compounding is superior to less frequent.
  • Once invested, keep your funds deposited for the full term to avoid costly early withdrawal penalties.
Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 20, 2021

3 Cited Research Articles

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  1. Consumer Financial Protection Bureau. (n.d.). Annual Percentage Yield Calculation. Retrieved from https://www.consumerfinance.gov/rules-policy/regulations/1030/a/
  2. Federal Deposit Insurance Corporation. (2021, July 19). National Rates and Rate Caps - Monthly Update. Retrieved from https://www.fdic.gov/regulations/resources/rates/
  3. Federal Reserve Bank of St. Louis. (n.d.). Effective Federal Funds Rate (Data and Definition). Retrieved from https://fred.stlouisfed.org/series/FEDFUNDS