A CD, or Certificate of Deposit, is a savings product that pays a guaranteed interest rate as long as you don’t withdraw for a specified period of time. They are offered by banks, credit unions, and other financial institutions.

But how are they different from other popular savings products? Let’s take a look at how they compare to high-yield savings accounts and money market accounts.

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How does a CD work?

A CD (Certificate of Deposit) pays a guaranteed interest rate for a specified period of time, usually 6-12 months, and requires a minimum balance. In exchange, you agree not to make any withdrawals for that period of time. If you must access your money before then, you have to pay an early withdrawal penalty. There are also flexible CDs that allow you to withdraw early without a penalty, but they usually pay a lower interest rate than fixed term CDs.

Because you are giving up the ability to withdraw whenever you want, they pay you a higher interest rate than regular savings accounts. This is because the bank can invest your money for a longer period of time knowing you won’t withdraw it, allowing them to earn higher returns on their investment.

Similar to your regular checking or savings account, CDs are FDIC (Federal Deposit Insurance Corp) or NCUA (National Credit Union Administration) insured up to $250,000.

CD vs High Yield Savings

Unlike CDs, high-yield savings accounts don’t have withdrawal limits and don’t pay a guaranteed interest rate. They pay a variable rate, meaning it can change at any time depending on the interest rate environment. Because you can withdraw at any time, the rate is usually lower than a CD rate.

Many high-yield savings accounts don’t have minimum balance requirements, but that varies depending on the bank. Like CDs, high-yield savings accounts are also FDIC or NCUA insured up to $250,000.

CD vs Money Market

Unlike CDs, money market accounts don’t have withdrawal limits and don’t pay a guaranteed interest rate. Like high-yield savings accounts, they pay a variable rate that can change at any time. Because you can withdraw at any time, the rate is usually lower than a CD rate.

Like CDs, money market accounts usually have minimum balance requirements and are also FDIC or NCUA insured up to $250,000.

Unlike high-yield savings accounts and CDs, money market accounts have debit card access and allow you to write checks. It’s more like a hybrid between a savings and checking account.

CD vs High Yield Savings & Money Market

When should I use a CD?

CDs, high-yield savings accounts, and money market accounts are all different types of savings products. The main difference being CDs give you a guaranteed interest rate in exchange for a specified time period where you cannot withdraw. You should use a CD if you don’t need access to your savings for at least 6-12 months and want an investment that’s lower risk than stocks or bonds.

CDs, like high-yield savings accounts and money market accounts, are considered less risky than investing in stocks or bonds because you won’t lose the money you put in if it’s under the FDIC or NCUA limit of $250,000. This means that no matter what happens, you’ll get all of your money back as long as it’s under that limit. With stock or bond investments, there is no such guarantee and it is possible to lose the money you put in.

The important things to look for when shopping for CDs are:

— What is the interest rate being offered?

— How long is the term, or the time period you can’t withdraw the balance?

— What is the minimum balance?

— Is it FDIC or NCUA insured?

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