The pros and cons of CDs

Certificate of deposit advantages and disadvantages


Once you’ve built up your savings, you may start looking for new ways to invest your extra cash—something just as safe as your savings account but with a little more upside. When this happens, you’ll likely come across certificates of deposit (CDs).

And for good reason: CDs are a predictable and secure way to invest your money.1 But there are a few things to consider before opening a CD account. To figure out whether CDs are for you, check out the pros and cons of CDs before investing in them.

The pros of CDs

There are plenty of CD advantages, mostly around security and predictability. They include:

A fixed interest rate

When you open a CD, you decide exactly how much you want to invest and how long to invest. Many banks allow you to open a CD account online. In exchange for keeping your money in the account for the time agreed, you receive a fixed interest rate.1

Higher returns

Those average rates are typically higher than you’ll receive in a traditional savings account.2

Predictable returns

Unlike other investments, CDs are considered one of the safest savings options.1 There’s no question of how it will perform or how long you’ll keep it. You’ll invest a specific amount at a locked rate for a specific amount of time.

Interest options

Often people assume the interest earned on a CD can only be collected once it fully matures. However, many banks allow customers to choose to receive the earned interest more often—either monthly, every six months or annually.1 

Ladder options

A CD ladder is an investing strategy in which customers invest in CDs of increasing lengths—1 year, 2 years, etc. This lets investors tap into their money along the way while keeping some of it invested for a longer period.

Security

One of the biggest CD benefits is security. Like checking and savings accounts at federally insured banks, CD accounts are insured by the Federal Deposit Insurance Corporation, FDIC for short, up to the allowable limits.1

The cons of CDs

There are some CD disadvantages. They include:

Less flexibility

With a savings account, the money is easily accessible in case of a financial emergency or a change in spending priorities. With CDs, you typically can’t withdraw the money whenever you want—at least not without paying a penalty.3

Inflation

Another disadvantage is that CD interest rates can sometimes struggle to keep up with inflation.1 When inflation rises, the value of your dollar goes down. So if you invest in a CD with a 1.5% interest rate, and inflation rises 1.9% over the same period, your real returns won’t be as valuable.

Are CDs for you? If you’ve built up your savings and are looking to earn a little more for your efforts, they might be. When it comes to investing in CD accounts, the pros and cons all come down to predictability and flexibility. Only you will be able to find the balance between the two that works best for your financial situation.


This site is for educational purposes. The material provided on this site is not intended to provide legal, investment, or financial advice or to indicate the availability or suitability of any Capital One product or service to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional.

  1. Certificates of Deposit (CDs) (undated). Retrieved February 7, 2022, from https://www.investor.gov/introduction-investing/investing-basics/investment-products/certificates-deposit-cds.
  2. Certificate of deposit: What is a CD? (July 25, 2021). Retrieved February 7, 2022, from https://www.bankrate.com/banking/cds/what-is-a-cd/.
  3. I cashed my certificate of deposit (CD) before it matured, and the bank charged me an early withdrawal penalty. Can it do this? (April 2021). Retrieved February 7, 2022, from https://www.helpwithmybank.gov/help-topics/bank-accounts/certificates-of-deposit/cd-early-penalty.html.

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