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What is a high-yield CD?

Ivana Pino · Senior Writer

Updated Thu, Nov 7, 2024 7 min read

When it comes to saving, where you put your money is just as crucial as how much you’re putting away each week or month.

One savings vehicle that could help you supercharge your savings? A certificate of deposit (CD). More specifically, a high-yield certificate of deposit.

CDs work a little differently than a traditional savings account, and high-yield CDs differ slightly from regular CDs because they give your balance a little extra help in the form of compound interest. If the goal is to grow your savings, a high-yield CD with a competitive annual percentage yield (APY) could help you reach your goal faster.

What is a CD?

A CD is a type of savings account offered by most brick-and-mortar banks, as well as online banks and credit unions. This account type earns compound interest over a fixed period of time. Unlike a traditional savings account, CDs require you to lock your money up for a set period in exchange for a higher interest rate. Once you deposit your principal balance, that balance will earn interest for the remainder of your term. CD term lengths usually range anywhere from a few months up to 10 years.

At the end of the term, your CD will reach its maturity date, and you’ll be able to withdraw your principal balance, plus any earned interest. You may also be able to roll over your savings into a new CD.

The thought of not being able to touch your money for a set period may give you pause, but the appeal of a high-yield CD is that you’ll be rewarded with a higher return for practicing some restraint.

Currently, the average rate for a CD can range from 0.23% for a 1-month term up to 1.81% for a 12-month term. Of course, these are just national averages. Many financial institutions offer high-yield CD rates upwards of 4.5%.

CD rates move in accordance with monetary policy set by the Federal Reserve. The Fed controls one interest rate: the federal funds rate, which is the short-term rate banks use to borrow from each other. That trickles down and affects interest rates on bank accounts, personal loans, and more. After a series of rate hikes meant to quell inflation, the Fed decided to cut its target rate by 50 basis points in September and another 25 basis points in November.

That means now could be the last chance to lock in historically high CD rates before they begin falling.

How a high-yield CD works and how it can help you save

High-yield CDs can be used as an investment vehicle if you want to dip your toes in a low-risk investment and benefit from the compound interest earned on your principal savings account balance.

Some savers may also use a high-yield CD, or multiple CDs with varying terms, as a way to generate extra income. This is known as a CD ladder — a savings strategy where you open multiple CDs with different terms and tap into a portion of your savings each time one of your CDs matures or roll it over into a new CD.

A high-yield CD can also simply be a safe place to park your money that guarantees a strong rate of return. This type of CD can help you meet specific financial goals, like saving for a down payment on a house or other short-term goals.

To determine the right CD for you, you’ll need to consider all of your account options.

The different types of high-yield CDs

Fixed-rate CDs: Most traditional CDs are fixed interest-rate CDs. This means that your APY won’t fluctuate for the duration of your CD’s term.
Bump-up CDs: These CDs allow you to take advantage of any interest rate increases your bank or credit union may offer on its CD products. Say your APY was 4.00% when you first opened your account, but your financial institution has since raised that rate to 4.25%. You’ll be able to take advantage of that higher rate with a bump-up CD.
Step-up CDs: These CDs allow you to earn more interest on your balance over time with periodic APY increases.
No-penalty CDs: No-penalty CDs may come with lower APYs compared to other CD accounts, but they also have a bit more wiggle room. With this kind of CD, you can make a withdrawal from your account before your maturity date without incurring an early withdrawal penalty.
Callable CDs: If interest rates fall, your bank may redeem a callable CD before its maturity date. In this case, you’d get your principal balance back, plus any earned interest up to that point.
Jumbo CDs: Jumbo CDs typically offer a lucrative APY, but they require a higher minimum deposit than most other CD products — usually starting at $100,000.
Add-on CDs: Add-on CDs allow you to make additional deposits into your account after your initial deposit. This way, you’re able to continue building up your savings over time.

Opening a high-yield CD

Once you’ve selected a bank or credit union to open your account with, and you’ve determined that it’s the right product and the best CD rate for your needs, you can fill out the necessary forms to open an account.

You’ll want to double-check that your bank or credit union is federally insured through the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). Opening a CD that’s insured will protect your savings if your bank or credit union fails.

To open an account, you’ll need to provide your banking institution with your personal information, such as your full name, date of birth, address, Social Security number, or tax ID. You’ll also need a funding source for your minimum deposit.

After your account is opened, all you need to do is sit back and let the magic of compound interest do the rest of the work for you. As you approach the end of the term, your bank will likely reach out to you regarding your options. At this point, you can either roll over your principal balance and earned interest into a new CD, or withdraw your money.

Alternatives to a high-yield CD

A CD isn’t always the best fit for your savings needs, especially if you’re looking for an account that offers greater access to your funds. If your goal is to save for emergencies or to cover a short-term expense, you might consider other banking products.

High-yield savings account: A high-yield savings account is a type of deposit account that offers a higher APY than a traditional savings account. Like traditional savings accounts, HYSA accounts don’t usually offer debit card access or check-writing privileges, but may offer account holders the ability to transfer money between their savings and checking accounts using an ATM card or online. One added perk is that a high-yield savings account doesn’t typically require a high deposit amount — making it an ideal option for new savers. High-yield savings accounts may, however, come with withdrawal limits to encourage you to save more.
Money market account: A money market account is another type of deposit account that functions as a hybrid between a checking and savings account. Similar to a checking account, your MMA will come with a debit or ATM card for easy access to your money, but it will likely offer a more generous APY than your standard checking account.

Ultimately, the best savings strategy is the one you can stick to. If you think that limiting your access to your savings will only tempt you to spend even more or make it harder to cover emergencies in a pinch, there are other high-yield alternatives that offer greater liquidity while still helping you meet your goals.

If you’re aiming to save for a longer-term goal, a CD can help you grow your savings and resist any temptation to dip into your balance.