Banking » Guides » Pros and Cons of Investing in a Certificates of Deposit (CDs)
Advertiser Disclosure This website is an independent, advertising-supported comparison service. The product offers that appear on this site are from companies from which this website receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). This website does not include all card companies or all card offers available in the marketplace. This website may use other proprietary factors to impact card offer listings on the website such as consumer selection or the likelihood of the applicant’s credit approval. This allows us to maintain a full-time, editorial staff and work with finance experts you know and trust. The compensation we receive from advertisers does not influence the recommendations or advice our editorial team provides in our articles or otherwise impacts any of the editorial content on The Smart Investor. While we work hard to provide accurate and up to date information that we think you will find relevant, The Smart Investor does not and cannot guarantee that any information provided is complete and makes no representations or warranties in connection thereto, nor to the accuracy or applicability thereof. Learn more about how we review products and read our advertiser disclosure for how we make money. All products are presented without warranty.

Pros and Cons of Investing in a Certificates of Deposit (CDs)

Certificate of deposit (CD) is one of the most common investments - here are the main pros &cons you should consider before investing.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

We earn a commission from our partner links on this page. It doesn't affect the integrity of our unbiased, independent editorial staff. Transparency is a core value for us, read our advertiser disclosure and how we make money.

Table Of Content

Key Takeaways

  • Investing in CDs has some advantages: they usually pay higher interest rates compared to savings and money market accounts, they are safe and the minimum deposit is low.
  • Investing in CDs also has some disadvantages: Unless it's a no-penalty CD, clients have to pay an early withdrawal penalty if they decide to withdraw the money before the term. Also, CDs are exposed to inflation risks as well.
CDs advantages and disadvantages
While CDs offers high rates compared to other savings plan, you have to wait until it's mature (Photo by Monster Ztudio/Shutterstock)

What Are Certificates of Deposits (CDs)?

Technically, a certificate of deposit (CD) is a document that evidences a contract that a depositor enters with a bank for a fixed period. This period is what they call the term. What happens in the transaction is that the depositor entrusts his funds to the bank for the time that they agree upon, and the bank agrees to pay interest to the depositor.

Essentially, CDs fall under the classification of time deposit. Their interest rates are higher than regular savings accounts (but lower than other instruments like bonds) because you keep your money in the bank for a specific number of months or years. It could be six months, 18 months, or several years.

The interest rate adjusts accordingly to the term length or the time you promise to keep your money in the bank. The longer the funds will remain with the bank, the higher the interest they will pay to you.

CDs Advantages And Disadvantages

Here are the main pros and cons to know before putting your opening a CD:

Pros
Cons
Laddering Options
Inflation Risk
Higher Returns Compared To Other Deposits
Not Flexible
Secure
Taxable Investment
Low Minimum
Early Withdrawal Penalty
Diversity

If the rates are low at the beginning of the term, you can use laddering to take partial advantage of variable rates. Choosing a CD ladder means dividing your investment into several smaller CDs at higher rates that will become due at different pre-selected dates.

Doing this will afford you the potential for maximum growth and more liquidity. You may be able to access your funds a little faster than normal.

CD Laddering banks
CD Laddering is a great way to maximize growth and more liquidity

In a CD, you lock in your money for a specific period such that you don’t have the liberty of taking it back at a moment’s notice like a savings or checking account. This makes CDs more valuable to banks because they can hold on to the funds (and use them) longer.

For this reason, banks are willing to pay CD investors a higher rate in exchange for letting their money stay for a set amount of time. You should compute how much net interest you could potentially earn from your deposit.

Perhaps the best come-on that CDs offer is their security. CDs have FDIC insurance coverage so they are one of the safest investments available in the market. 

As of 2024, the deposit insurance covers all bank and credit union CDs up to $250,000 per financial institution.

Most of the banks impose limits on the amount of money you can send through an ACH transfer. There might be da

CD products have evolved such that financial institutions now offer a range of CD products with various rates and maturity options that would fit your investment goals.

One defect of CDs is that they can never stand against inflation and tend to suffer as the inflation rate goes up.

If the rate of inflation is higher than your rate of return on the CD, the value of your money will go down tremendously. You will lose out on purchasing power because your earnings will not be able to buy many things at all.

If you're looking for an inflation hedge, gold may be better than CDs.

If you have a savings account, an emergency doesn’t have to paralyze you financially because you know that you can get your money from the bank at any time. 

With CDs, you can’t just take your money when you want or need it and if the bank will allow you, it will be subject to an early termination penalty.

Sign Up for

Our Newsletter

Join our community for the latest attractive savings rate changes ,expert insights, and member-only perks

Ordinarily, you still have to pay income tax on the not-so-big interest you earn from a CD. The IRS considers the interest as interest income so you’ll have to report that in the year you’ve received it. 

There is no specific tax rate for interest income on CD so it falls under the tax rate for your individual bracket. This means that the final tax will depend on whatever total income you put on your return. 

If you hold your CD in a retirement account such as an IRA, you may not owe any income tax on the interest you earn every year. Instead, you’ll pay the taxes when it comes to getting your money from your retirement account.

The rules for early withdrawal will vary for each bank and credit union. 

In many cases, you will forfeit a portion of the interest that you may have earned by the time you make the untimely withdrawal.

Are CDs a Good Investment in 2024?

CDs are a good option for people with a lot of money who want to put them into something safe. The interest rates increase supports CDs that provide much higher rates in 2024 compared to previous years.

CDs have been around since the beginning of banking, and other investment choices have emerged. However, many people doubt their relevance in the future because they are one of the oldest options accessible.

Examining the present economic circumstances and your particular financial situation might help you decide if a CD is a good investment. The certainty of a CD is its greatest charm. Because the rate is fixed, predicting future revenues is no longer a guessing game. Furthermore, most banks provide higher rates on CDs than what they offer on savings accounts.

CDs, on the other hand, may not be the best option for people who live paycheck to paycheck and wish to supplement their income with investments. CDs require you to keep your money locked up for a period of time, so taking it out too soon can have negative implications.

While a CD functions similarly to a savings account, you will not be able to access it early without incurring a penalty.

Financial Institution
Savings APY
CD APY
American Express
4.30%
Up to 4.75%
Marcus
4.40%
4.00% – 5.05%
Capital One
4.35%
4.00% – 5.10%
Discover Bank
4.25%
2.00% – 4.70%
Quontic
4.50%
4.30% – 5.30%
UFB Direct
Up to 5.25%
/
Ally Bank
4.25%
3.00% – 4.50%
TIAA Bank
5.15%
3.95% – 5.15%

Can you Lose Money on CDs?

When it comes to your long-term finances, inflation is a significant problem. For example, if inflation is 2% and your CD pays 1%, you will lose some of your money's purchasing power over time.

If you're planning on keeping your money in an account, this means you should think about how the rate of interest compares to inflation.

Do CDs Help You Build Credit?

When making any new financial decision, it's critical to consider how it will affect your credit score. Regarding CDs, it's essential to think whether this investment is suitable for you.

On a basic level, CDs have no impact on your credit. However, some people use them to improve their ratings mistakenly. This is accomplished by obtaining a secured loan on the CD. Your credit score will improve as you repay the loan. On the other hand, investing solely in a CD will have no positive or dire consequences.

Bottom Line

Certificates of Deposit (CD) appeal to people who want to save money in a bank or credit union with a relatively higher interest. You can save money for the future and earn interest without you doing anything while your money remains safe in the bank. 

The disadvantages of CDs are a handful, but they are minor and not enough to outweigh the advantages.

FAQs

It is unlikely to lose principal with a CD, as they are considered low-risk, but inflation may erode the real value of returns.

Yes, CD interest is generally taxable income, and investors may need to report it on their tax returns.

Some banks allow using a CD as collateral for a loan, providing a secured borrowing option.

At maturity, investors can choose to renew the CD, withdraw the funds, or explore other investment options.

CD interest rates are fixed, offering predictability for investors.

Interest can be paid monthly, quarterly, annually, or at maturity, depending on the CD terms.

Compare CD Rates

Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Search
Best CD Rates
Top Offers From Our Partners

UpgradeLogo

Savings Rate: 5.21% APY
Minimum Deposit:
$0
 
CIT-Bank-Logo
Savings Rate: 5.00% APY
Minimum Deposit:
$5,000
Quontic bank logo
Savings Rate: 4.50% APY
Minimum Deposit:
$100
 
Advertiser Disclosure
The product offers that appear on this site are from companies from which this website receives compensation.
Top Offers From Our Partners

Chase_logo

Promotion:
$300 New Chase checking customers enjoy a $300 bonus when you open a Chase Total Checking® account and make direct deposits totaling $500 or more within 90 days of coupon enrollment.. Expired on 7/24/2024
Chase Overdraft Assist
With Chase Overdraft AssistSM, you won’t be charged an Overdraft Fee if you’re overdrawn by $50 or less at the end of the business day OR if you’re overdrawn by more than $50 and you bring your account balance to overdrawn by $50 or less at the end of the next business day

UpgradeLogo

Fees:
No monthly fees No monthly fees and no overdraft fees. Plus get reimbursed for ATM fees with an active account 
Rewards:
Up to 2% cash back Up to 2% cash back on common everyday expenses for active accounts with monthly $1,000 direct deposit, and up to 1% cash back for other purchases 

Promotion:
$300 Use Promo Code “AXOS300” for a $300 bonus when you apply for a Rewards Checking account
Up to 3.30% APY
to get the maximum rate (up to $50,000) you’ll need monthly direct deposits of $1,500 (0.40% APY), 10 transaction on your debit card (+0.30% APY), average daily balance of $2,500 on Axos Invest Managed Portfolio (+1.00% APY), average daily balance of $2,500 on Axos Invest Self Directed Trading Account(+1.00% APY) and make full monthly payment on loans (mortgage, personal and auto) with Axos account (+0.60% APY).

PNC bank logo

Promotion:
Up to $400 Open a new, select Virtual Wallet product and receive $500/$2,000/$5,000 or more in qualifying monthly direct deposits within 60 days to earn a $100/$200/$400 bonus.
Subject to state availability
PNC Virtual Wallet ® is available in AL, AZ, CA, CO, DC, DE, FL, GA, IL, IN, KY, MD, MI, NC, NJ, NY, NM, OH, PA, SC, TX, VA, WI, and WV. Virtual Wallet ® is offered in the state of MO with the exception of the Greater Kansas City area. Product availability may vary based on where you open your account and the Zip code of your primary address.

penfed personal loan

APY on Daily Balances
0.15% APY on daily balances of less than $20,000 or 0.35% APY on daily balances of $20,000 up to $50,000
Get paid up to 2 days early
Set up direct deposits and get your paycheck up to 2 days early

Promotion:
Up to $4,000 New customers may earn up to $4,000 when they open an eligible HSBC Premier checking account from January 8, 2024 through March 27, 2024 and complete qualifying activities:

• Receive a cash bonus of $1,500 when you deposit or invest $100,000 – $199,999.99

• Receive a cash bonus of $2,000 when you deposit or invest $200,000 – $299,999.99

• Receive a cash bonus of $2,500 when you deposit or invest $300,000 – 499,999.99

• Receive a cash bonus of $3,500 when you deposit or invest $500,000+

• Earn an extra $500 when you set up recurring monthly Direct Deposits totaling at least $5,000 for 3 months
Wealth Products & Advice
Get access to wealth products, insights and advice from an HSBC Financial Professional through HSBC Securities (USA) Inc
Advertiser Disclosure
The product offers that appear on this site are from companies from which this website receives compensation.

#1 In Banking

Our Newsletter

Get expert advice, insider tips, fresh banking promotions and rate changes on savings accounts and CDs

Banking Promotions & Latest Rate Updates

Our Banking Newsletter

Sign up for our newsletter and gain access to expert advice,
insider knowledge, and exclusive updates