SUBSCRIBE & SAVE Less than $3 per week View Profile The Explainer Talking Points The Week Recommends Newsletters From the Magazine The Week Junior Food & Drink Personal Finance All Categories Newsletter sign up Personal Finance the explainer What are certificates of deposit and how do they work? CDs may be the right solution for your savings goals Newsletter sign up CDs are savings accounts that lock up your money for a period of time in exchange for better interest rates (Image credit: designer491 / Getty Images) Becca Stanek, The Week US Not to be confused with the metallic music-playing discs of the '80s and '90s, CDs — formally known as certificates of deposit — are a savings option still very much in play. This particular savings account option locks up your money for a certain period of time and in exchange, you earn interest, often at a better rate than your standard savings account. While not the right solution for all savings goals, CDs can be worthwhile for a number of purposes. What is a certificate of deposit? A certificate of deposit (CD) is a type of savings account that "pays a fixed interest rate on money held for an agreed-upon period of time," said Investopedia. CDs are usually offered by banks and credit unions, "although credit unions often refer to them as share certificates," said Bankrate. Brokerage firms may offer them as well. Subscribe to The Week Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives. SUBSCRIBE & SAVE Sign up for The Week's Free Newsletters From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox. From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox. CDs can have interest rates that are "higher than savings accounts," said Investopedia, but in exchange, you "lose withdrawal flexibility," as you will pay a penalty if you withdraw your funds from a CD before the amount of time you had agreed to deposit your funds for — known as the CD's term — has elapsed. How do CDs work? With a CD, "you usually can't add money to one after you open it or withdraw the money whenever you want," said Bankrate. Rather, you deposit a certain amount upfront that then remains in the CD for the length of its term. "Terms can be as short as one month to as long as 10 years," and there may be a minimum opening deposit necessary to open the CD, which can be in "amounts such as $500, $2,500 or more," said Bankrate. Once you deposit your money, it will start earning interest, usually at a fixed interest rate. "On the date the CD matures, or when the term length is over, savers can get their money back, in addition to the interest earned over time," said CNBC Select. However, if you take out money before then, you will owe an early withdrawal penalty, the amount of which "can vary depending on your bank and your CD's term length, but it's usually the interest earned, or the interest that you would have earned, over a certain number of days or months," said CNBC Select. What are the benefits and risks of CDs? The major upside of CDs is the potential for "returns without much risk," said NerdWallet. With a CD, you can "avoid the volatility of the stock market and earn a return that's typically better than other savings accounts." Even better, your funds are insured, which means up to a certain amount "is guaranteed to be returned to you if a bank goes bankrupt," said NerdWallet. One downside, however, is that CDs tend to offer "lower returns than other types of investments, like stocks," said Bankrate. You may also need to have a lump sum ready to open one up. And again, you should ideally not touch your funds until the term is up to avoid a penalty — which may be an imposition in the event of an emergency. Explore More Interest rates Sign up for Today's Best Articles in your inbox A free daily email with the biggest news stories of the day – and the best features from TheWeek.com Contact me with news and offers from other Future brandsReceive email from us on behalf of our trusted partners or sponsorsBy submitting your information you agree to the Terms & Conditions and Privacy Policy and are aged 16 or over. Becca Stanek, The Week US Social Links Navigation Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She previously served as a deputy editor and later a managing editor overseeing investing and savings content at LendingTree and as an editor at the financial startup SmartAsset, where she focused on retirement- and financial-adviser-related content. Before that, Becca was a staff writer at The Week, primarily contributing to Speed Reads. EPA is reportedly killing Energy Star program The program for energy-efficient home appliances has saved consumers billions in energy costs since its 1992 launch Supreme Court allows transgender troop ban The US Supreme Court will let the Trump administration begin executing its ban on transgender military service members 'You might be surprised by how much you find yourself cheering for them' Instant Opinion Opinion, comment and editorials of the day You might also like What to know before cosigning a loan the explainer Consider the long-lasting implications before helping out a loved one How often should you check your credit report? 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