Skip to main content

How Does a Certificate of Deposit Work?

By: Chelsea Stefanelli, Director - Deposit Operations and Specialized Services

Posted on 4/6/2023 3:06:40 PM

Three savings jars labeled 'Travel,' 'Education,' and 'House' sit on top of a table outside with loose money in them.

Are you looking to save money and increase your earnings? If so, a Certificate of Deposit (CD) may be the right investment vehicle for you. CDs offer a reliable way to put aside funds with the peace of mind that comes from knowing your money is guarded by FDIC/NCUA protection, while at the same time earning more than other money market accounts or savings accounts may provide. Read on to learn more about how a CD works and why it might make sense for you as an investor.

What is a certificate of deposit?

A Certificate of Deposit (CD) is a financial instrument that allows you to set aside a sum of money for a specific amount of time at a fixed or variable interest rate. Depending on the institution, these terms can range from three months up to 10 years (5 years with CFCU). While these funds may be set aside for a specific amount of time, you do have the option to withdraw them early if needed, usually subject to an early withdrawal penalty.

How does it work?

Investing in a CD is a straightforward process. You place your desired funds into an account at a financial institution and agree to leave that money on deposit for a specified length of time. In exchange, the institution pays you a fixed or variable interest rate on your funds, typically higher than what other types of savings accounts offer. When the agreed upon term ends, you will receive your original investment plus any accrued interest back from the institution.

That said, it's important to understand the difference between APR and APY when making investment decisions. APR stands for Annual Percentage Rate and measures the interest charged on a debt over one year. Meanwhile, APY stands for Annual Percentage Yield and is used to measure compound interest earned over a year; it is usually associated with deposit accounts. Generally speaking, investors want higher APY rates so they can get better returns while borrowers may prefer lower APR rates since they are borrowing money and paying interest on top of their debt. Higher APY rates for accounts like CDs mean more earnings for you as the investor.

At CFCU, APY rates are higher than APR which works out well for CD investors. For example, if an investor deposited $1,000 into a one-year, 2% certificate—they would accrue $20.33 in interest over that period and receive their principal back ($1,000) plus their $20.33 in interest at the end of their term. If they chose to reinvest this combined amount ($1,020.33), their balance would have grown to $1,041.06 with another $20.73 earned as additional interest in the second cycle. With each successive cycle reinvested at 2%, the results compound, having significant impacts on earnings over time.

Key differences between a CD and a traditional savings account

When deciding between a Certificate of Deposit and a traditional savings account, it's important to understand the key differences between the two options. CDs typically offer higher interest rates than those on savings accounts; however, the funds are locked in for a fixed period of time. This makes CDs a great way to earn more money while knowing that you can still access it in case of emergency, although you may be subject to a penalty for early withdrawal. Generally, you can’t add funds to your CD over time, but some CD options at Community First allow additional deposits.

Conversely, savings accounts don't have as strict locking periods and are more liquid, meaning you can usually access your funds at any time without penalty. However, interest rates offered on savings accounts tend to be lower than those offered on CDs. Ultimately, it comes down to balancing liquidity with potential earnings and making sure you understand the terms and conditions associated with both investments before committing any money.

The advantages of a CD

A CD offers several advantages that make it a great way to save and grow your money. For starters, CDs typically have higher interest rates than traditional savings accounts and will earn more return on your money over time.

Additionally, CDs are insured by the FDIC or NCUA up to $250,000—giving you peace of mind knowing that your funds are protected. A CD is also a great way to protect designated savings for larger purchases such as a down payment for a house, since you can accumulate funds safely.

Family of three stands in the living room of a house they are viewing with a realtor.

Types of CDs at CFCU

Community First has a few different types of Certificates of Deposit:

Standard CD

Standard CDs have a fixed interest or variable rate, a fixed term, a minimum deposit, an early withdrawal penalty, and are FDIC/NCUA-insured.


An IRA CD is held within an individual retirement account.

Adjustable Rate CD

An adjustable rate CD has a set interest rate at the time of your initial deposit, but it comes with the option to “adjust” the rate once during the CD’s term to the current rate.

What happens when the CD term is up?

When you reach the end of your CD term, you have several options. You can choose to reinvest your money into a new CD with the same financial institution or one of its competitors, which might offer more attractive rates. Alternatively, you have the option to withdraw all of your funds and use them as you wish without an early withdrawal penalty. Some or the entirety of your funds can also be transferred to a savings or money market account within the same financial institution.

It is important to stay on top of the dates of your term because once your CD matures, you usually only have a short amount of time to withdraw the funds before the CD automatically renews with a new rate based on current CD rates for that term. At CFCU, members have a 14-day grace period to withdraw their funds once their CD matures. Additionally, members also have the choice to decide if their CDs will auto renew or not. These are important factors to consider when deciding where to open a CD.

How do I know if a CD is the right choice for me?

As with any financial investment, it is important to consider your individual circumstances and do your homework before committing to any decision. A Certificate of Deposit can be a great investment for anyone looking for an easy and safe way to save money. It provides peace of mind as your investment is secure and the interest rates are often higher than traditional savings accounts. However, if you need access to your funds quickly in case of emergency, then a CD may not be the right choice for you.

Before investing in a CD, it’s important to research different terms and interest rates available, as well as any early withdrawal penalties that may apply. Additionally, consider how much money you can afford to tie up in a CD and make sure it fits within your overall savings plan. Knowing how a CD works and its potential benefits will help you determine if it is the right choice for you.

If you’re considering investing in a CD at Community First Credit Union, schedule an appointment with one of our Member Services Representatives. Our team can help find the best fit for you to jumpstart your savings goals in 2023.

Don't miss another article

Stay up to date with the latest financial tips and news. Subscribe to our blog.