Should you put your money in a high-yield CD?

What is a High Yield CD?

A high-yield CD is a type of certificate of deposit that earns an above-average interest rate. As with any other CD, a high yield CD requires you to make an initial deposit and agree to keep it there for a set period of time, also known as the due date. In return, you are guaranteed to receive a certain amount of interest.

A high return CD may not be as common as traditional CDs and may require a larger deposit. They are usually offered by online banks, which can offer higher interest rates since they don’t have the overhead of brick-and-mortar institutions.

How does a high yield CD work?

A high-yield CD works similarly to a normal CD, except for the interest rate. The bank or credit union you are involved with will show you the interest rate and compounded interest up front so you can estimate how much you will make by the due date.

Once your account is open, make your first and only deposit. Interest is calculated either monthly, quarterly or annually until the end of the term. When your CD is mature, you typically have seven days to decide what to do next. You can choose to renew your CD with the same term, transfer your deposit to a CD with a different term (and possibly a different interest rate), or withdraw your money.

If you withdraw your money before the CD due date, you may have to pay a prepayment penalty. How much it costs depends on the terms and conditions of your CD.

High Yield CD vs. High Yield Savings Account

Both high yield CDs and high yield savings accounts are deposit accounts maintained with banks or credit unions. Both bear interest, sometimes up to 5%. The main difference is how quickly you can access your funds.

With a high-yield CD, you must hold your money in place until the due date, otherwise face a prepayment penalty. On the other hand, you can usually withdraw money from a savings account at any time. You can also deposit extra money into a savings account while depositing money in a lump sum with a CD.

While both high-yield CDs and high-yield savings accounts offer higher-than-average interest income, interest rates on savings accounts can fluctuate. With CDs, your interest rate is guaranteed until your account matures. Depending on the financial institution, high yield CDs generally offer higher interest rates than high yield savings accounts.

Is a High Yield CD Safe?

High yield CDs are generally safe because they are either FDIC or NCUA insured depending on whether they are with a bank or credit union. That means you can recover your money (up to $250,000 in most cases) if the financial institution goes bankrupt or goes bankrupt. Note that the limit applies to any type of banking product at a financial institution. So if you have three CDs that add up to $500,000 and the bank goes bust, you’re still only insured for up to $250,000.

And there’s another way to reduce your risk: because they offer a guaranteed interest rate on the amount you deposit, you’ll get a consistent return even if interest rates on other savings products go down.

Should you put your money in a high-yield CD?

High-yield CDs are great for those who don’t need to access all of their money for months or more and are interested in a higher interest rate than a savings account. For example, if you’re planning to buy a house in a year and you want to increase your down payment, it might make sense to put the money on a CD so that it earns more interest than a regular savings account.

However, if you’re not sure when to access the money, or are more interested in earning a higher return over a longer period of time, it might be better to consider alternatives. For example, it makes more sense to keep your emergency funds in a savings account because you want to be able to add them whenever you want and never know when you’ll need to use them. Or if you have more than five years to grow your money and want a higher return, a brokerage account might be the right choice. In most cases, people spread their money across different accounts that serve different purposes.

Whether you’re looking to invest your money in a high-yield CD or some other savings vehicle, it’s important to do thorough research to find out if the product suits your financial needs. However, if you’re looking for a relatively low-risk investment and don’t need the money quickly, a high-yield CD might be worth it.

Editorial Disclosure: All articles are created by editors and contributors. The opinions expressed therein are solely those of the editors and have not been reviewed or approved by any advertiser. The information presented in this article, including tariffs and fees, is correct at the time of publication. Check the lender’s website for the latest information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as the finance and home services editor for Hearst’s e-commerce team. Email her at lauren.williamson@hearst.com.