How to Open a Certificate of Deposit

Once you decide on the right CD for your savings goal, applying is simple.

Young woman working from home on her laptop.
d3sign/Getty Images

A certificate of deposit, or CD, is a low-risk savings tool with a guaranteed rate of return. Still, this level of predictability comes at a cost: You have to commit to leaving your funds in the account for a specific amount of time. However, CD accounts typically pay more interest than traditional savings accounts to compensate for the lesser flexibility. If a CD fits your savings goal, the next step is to open one.

1. Decide what kind of CD you want to open

There are more than 10 types of CDs to choose from, so it's essential to determine which works best for your investment. Here are a handful of different CDs to consider:

  • Traditional CDs: Traditional CDs pay interest on your deposit for a fixed term. You make a one-time deposit, then leave the funds to grow until the CD matures. Traditional CDs typically penalize you for early withdrawals.
  • Add-on CDs: With a traditional CD, you cannot make additional deposits once it's open. However, add-on CDs are the exception. With an add-on CD, you can add money to the account balance after the initial deposit. 
  • No-penalty (liquid) CDs: A liquid CD does not charge a penalty for early withdrawals. You can withdraw funds anytime, but even the best no-penalty CDs offer rates lower than a traditional CD.
  • Bump-up CDs: Bump-up CDs come in handy during a rising rate environment because you can request your CD be "bumped up" to the new interest rate. Banks usually allow at least one bump-up per term. 
  • IRA CDs: Brokered CDs are purchased through brokerages and traded like bonds. 

2. Choose your CD term

A CD term defines how long you will leave your money in the account. During this time, your deposit is inaccessible unless you're OK with paying the penalty. Picking the proper CD term is important because it influences your earning rate. 

Are you trying to save enough money to buy a car in two years, or are you stashing away cash for the big family reunion in six months' time? You'll want to pick a timeline that aligns with your overall goals. If you choose a five-year term, but that family vacation is next year, you'll face a penalty for early withdrawal when the time comes to book a flight. 

3. Select a bank or credit union 

To pick a bank, compare the best CD rates across federally insured banks and credit unions, keeping the CD term and type in mind. Banks and credit unions change their rates on CDs in response to changes in the Federal Reserve's rate, among other factors. 

Online banks tend to offer a higher annual percentage yield and lower fees than brick-and-mortar banks because they have fewer overhead expenses. However, it doesn't necessarily matter where you bank as long as it's insured by the Federal Deposit Insurance Corporation. CDs are one of the safest places to grow your money because the money is insured up to $250,000 per depositor, per account ownership type, per financial institution. If your bank goes bankrupt, your money is protected by FDIC coverage. 

4. Apply for a CD

Once you select a bank, it's time to submit an application. To open a CD account, you need the following:

  • Photo ID
  • Name, phone number, address and email
  • Social Security number and date of birth
  • Initial deposit

You can apply online, over the phone or in person at a branch. While online and phone applications are convenient and easy, some banks and credit unions may require that you visit a branch to open a CD account.

5. Pay the deposit 

After you open a CD account, you can make your initial deposit by transferring money from another bank account. If you are making an external transfer, meaning you're opening a CD at a new bank, you'll need to provide your routing and account number to complete the transfer. If you opened your CD account at your current bank, it may be as simple as transferring funds from your checking or savings account.

You'll also want to check on the bank or credit union's minimum deposit requirements. Most require a minimum deposit of at least $500 to buy a CD, and many want $1,000 or more. Remember that, unlike a savings account, you typically fund a CD once (unless it's an add-on CD).

The bottom line

So is a CD worth it? If you're interested in building a nest egg but don't need to tap into your savings quickly, a CD may make sense. However, CDs aren't generally used for creating an income stream, as the yield isn't sufficient to do so. But if you decide a CD fits your savings goal, opening up an account is relatively easy, and you may even be able to do so from the comfort of your couch.