The Pros and Cons of Certificates of Deposit (CD)

Written by Javier Simon, CEPF®

Edited by Marie White, CEPF®

Updated on May 22, 2025, 5:04pm ET

Investing in a certificate of deposit provides you with several benefits, but they are not for everyone. As with anything in the investing world, you face some risk with CDs, even though the risk is considered low. Before you decide to open an account, it is important to weigh the certificate of deposit pros and cons.

To see which types of investment may work best for you, consider working with a financial advisor.

What Is a Certificate of Deposit (CD)?

Certificates of deposits (CDs) are considered low-risk, safe savings vehicles that banks and credit unions offer. Similar to a bond, a CD collects interest and has a date of maturity, or term length. The time span can stretch anywhere from just a few weeks to several years. At the end of the term, the bank or credit union will return your deposit plus interest. However, if you withdraw your money early, you will face a stiff penalty.

To calculate how much interest you could earn with a CD, try using SmartAsset’s CD calculator.

Ultimately, the amount of your return depends on the bank and the annual percentage yield (APY) it is willing to deliver. Be sure to compare CD rates online from the best banks and credit unions across the country to find the right account for you.

When exploring CD options, pay close attention to how the bank compounds interest. Assuming the same interest rate and term length, a CD that compounds interesta daily will pay out more than one that does it on a quarterly basis. Financial institutions also tend to offer higher APYs on long-term CDs.

Nonetheless, there are many advantages to CD investing and even different strategies you can use with your investment to help your situation. Be sure to to weigh the CD pros and cons of any investment before deciding to move forward. No investment, regardless of how risky it is, will be a fit for everyone.

Pros of CD Investing

Most people, especially in a high-interest rate environment, are attracted to CDs because of the potential for a high return. In most cases, average CD rates tend to climb well above those tied to traditional savings and money market accounts (MMAs). The best CD rates typically come from banks that pay competitive rates on long-term CDs and compound interest daily.

Plus, most CDs are FDIC-insured, up to the legal limit of $250,000 per financial institution. This means that your money is protected by the federal government even if the bank fails.

Another advantage to CD investing is that you have many types of CDs to choose from.

Fixed rate CDs: With fixed-rate CDs, your rate is locked for the length of the term. So, if you open a 12-month fixed-rate CD with a 2.5% APY, that is the rate you will keep for the entirety of those 12 months.
Variable CDs: You can also invest in a variable CD. In this case, the bank can lower or raise your interest based on the Federal Funds rate and other factors. Given the additional risk, this option may appeal to risk-takers or those who speculate interest rates will rise in the short term.
Jumbo CDs: Several banks also offer jumbo CDs which require a much larger minimum deposit than traditional CDs. While some banks may let you open a traditional CD with as little as $100, jumbo CDs require minimum deposits around $100,000. The pro here is that a larger deposit, plus a high-interest rate, equals a major return.

Cons of CD Investing

An investor waters a bonsai tree surrounded by gold coins.

One of the biggest drawbacks to CD investing is the early withdrawal penalty. Each bank and credit union sets its own rules on how to treat early withdrawals.

In some cases, you may lose a portion of the interest you had earned when you make the early withdrawal. In other instances, you would lose all the interest you earned, plus a percentage of your principal.

The timing of your early withdrawal can also play a role. In any situation, taking your money out of your CD before its term ends is a bad idea, as it really downplays the benefits of CD investing. That’s why it’s crucial to open a CD for a term length you know you can stomach. Building an emergency fund before you open a CD can prevent you from reaching into your CD for the money you suddenly need. Whether you’re opening one CD or several, term length matters. For instance, you may miss out on better opportunities to invest your money if it’s locked away in a 10-year CD. By then, interest rates may have risen well above the fixed rate you started out with.

That is where CD laddering can be an enormous advantage.

CD Laddering

One of the biggest risks of CD investing is losing access to your money. There’s always the chance that you might need your money before the CD reaches maturity, nd if you make a withdrawal, you are likely to face an early withdrawal penalty.

To work around this potential issue, some people build CD ladders. This is when you open multiple CDs with different term lengths. While there are pros and cons to CD ladders, one of the biggest advantages is that it ensures you get a stream of income at different time intervals with each representing a rung on the ladder. For instance, you can get one return in three months and another nine months later. You can then choose to keep that money if you need it or reinvest it.

This option would also help you take advantage of FDIC protection if you have a lot of money to deposit because your CD is protected by up to $250,000 per financial institution.

When Should You Consider a CD?

Despite all the potential pros of CD investing, it is not for everyone.

A certificate of deposit (CD) can be a good option when you have savings you will not need in the short term. If you are planning for a future expense — such as a home down payment, a new car purchase or tuition — and you know exactly when you will need the money, a CD allows you to earn interest with minimal risk. Choosing a term that lines up with your timeline helps avoid early withdrawal penalties.

CDs also make sense for people who prefer stable, predictable returns. Unlike stocks or mutual funds, CDs are not subject to market swings. If you want to preserve your principal and earn guaranteed interest, a CD provides a low-risk way to grow your money. CDs are especially attractive when interest rates are high, allowing you to lock in a favorable rate for the entire term.

On the other hand, CDs are less suitable if your financial goals require flexibility. If you are unsure when you will need your funds or you expect possible emergencies, it is better to keep money in a more accessible savings account or money market account. Before opening a CD, it’s important to have enough liquid savings elsewhere so you don’t risk tapping into the CD early and losing interest or principal.

Bottom Line

An investor reviews investment performance.

CD investing is generally considered a low-risk way to invest. It can earn you a stronger return than putting your money in a savings or money market account. Plus, you can open multiple CDs and establish a CD ladder to get a return plus interest at different time intervals. If you decide to dip your hand in the cookie jar early, the bank or credit union will likely hit you with an early withdrawal penalty. That is why you should always make sure you open CDs with maturity dates you can stick to. As an added measure it always helps to have enough in savings before you decide to secure your money in a CD.

Consider working with a financial advisor who can help you structure your accounts in the way that aligns with your future goals.

Tips for Investing

If you feel like you’d like to invest but are not sure where to start, you may want to seek a financial advisor who can help with all of your investment questions or needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
You can establish a CD ladder to build an emergency fund. It could be a good way to get a larger return on your money than just keeping it in a savings account.
If you’re not sure about CD investing, maybe bonds are a better choice for you. So consider the differences in investing in bonds vs CDs.