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CD vs. High-Yield Savings Account: Which Is Better for You?

(Typically) higher interest rates make CDs an attractive choice, but they're not right for every situation.

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For short-term savings goals, certificates of deposit (CD) and high-yield savings accounts can both be good places to store your cash. Both types of deposit accounts have the potential to help you earn above-average interest rates. And depending on the financial institution you choose, you should be able to open safe, FDIC-insured CDs or high-yield savings accounts without much trouble.

Yet there are pros and cons to each of these savings options. So, if you’re on the fence about the best type of account to use for your financial goals, the following guide will provide some insight that could help you make a more informed decision. 

CDs vs. High-Yield Savings Accounts — The Basics

Here’s a closer look at CD and high-yield savings accounts, along with some details about what makes them different from one another (and different from standard checking and savings accounts too). 

How Does a Certificate of Deposit (CD) Work?

A certificate of deposit is a special type of deposit account you can open at most banks and credit unions. CDs may be available from traditional financial institutions and online banks and credit unions alike. 

What sets CDs apart from most other types of deposit accounts (e.g, checking accounts, savings accounts, high-yield savings accounts, money market accounts, etc.) are the restrictions that they feature. When you deposit cash into a CD, you agree not to withdraw those funds for a set period of time. This time frame is called the CD’s term. A CD term could last anywhere from a few months to several years, depending on the type of account you open. 

Let’s say you open a 5-year CD. In doing so, you agree to leave the funds you deposit into the account alone for at least five years, until the CD reaches maturity. If you opt to withdraw cash from the account early, you may have to pay an early withdrawal penalty. That penalty could offset some of the interest you earned on the account — potentially to a significant degree. 

In exchange for agreeing not to touch your CD funds for a predetermined period of time, a bank or credit union may offer you higher interest rates. At the time of writing, some of the best CD rates range between 3.00% and 4.50%. By comparison, the average interest a savings account earned in September 2020 (also called the annual percentage yield or APY) was just 0.17% according to the FDIC

Featured CD: CIT Bank 18-Month Certificate of Deposit

Offer Details

Secure application on issuer’s website.

CIT Bank Term CD
APY: Up to 4.50% APY
Monthly Fees: None
Minimum Opening Balance: $1,000
Features:
Daily compounding interest
No account opening or maintenance fees
FDIC insured

How Does a High-Yield Savings Account Work? 

A high-yield savings account is a type of savings account that typically pays higher-than-average interest on your money. At present, some of the best high-yield savings accounts offer interest rates between 2.25% and 3.60% — over 15 times higher than average national savings rates

With a high-yield savings account, you deposit funds just like you would with any other savings account, paying attention to any minimum balance or opening deposit requirements. When you need to access funds, you can withdraw them from a branch (if available) or via an ATM, or you might be able to transfer them online to a connected bank account. 

Keep in mind that with savings accounts (regular savings, high-yield savings, money market accounts, etc.), your bank might limit the number of withdrawals you can make per month. Often you cannot make more than six transfers or withdrawals from a high-yield savings account during a calendar month, though there may be some exceptions to this rule.  

If you’re interested in earning the highest APY possible on your money, you might need to consider opening a high-yield savings account with a different bank than you use on a regular basis. And although you might hesitate to open an account with another financial institution, there are some definite perks to keeping your savings in a separate bank account

Featured High-Yield Savings Account: Quontic Bank High Yield Savings

Secure application on issuer’s website.

Quontic Bank High Yield Savings Account
APY:
3.20%
Monthly Fees: No monthly maintenance fees
Minimum Opening Balance: $100
Features:
3.20% APY
No overdraft or monthly fees
Access to 90,000+ ATMs nationwide

CDs vs. High-Yield Savings Accounts

Below is a side-by-side comparison of the benefits that both CDs and high-yield savings accounts offer. 

Certificates of DepositHigh-Yield Savings Accounts
Penalties for Early WithdrawalsTraditionally Up to 6 Withdrawals Per Month
Offers Some of the Highest Interest Rates AvailableTypically Higher-Than Average Interest Rates
Generally No Monthly Maintenance FeesMonthly Maintenance Fees May Apply
Often FDIC Insured Up to $250,000Often FDIC Insured Up to $250,000
Typically Fixed RatesRates May Fluctuate with the Market

How to Choose Between a CD and High-Yield Savings Account

couple checking their investments
iStock

Both CDs and high-yield savings accounts can offer a lot of value as savings vehicles to help you reach your financial goals. 

You might consider opening a CD if you:

  • Are working toward long-term savings goals and know that you won’t need to access a portion of your savings for several months or years. You can also consider no-penalty CDs if you want flexibility to withdraw funds early, if needed. However, the interest rates on those accounts typically aren’t as generous. 
  • Want to minimize investment risk and avoid the volatility of the stock market, at least with a portion of your portfolio. Yet consider discussing all of your options with a professional financial advisor first. The SEC notes that the stock market has produced historical annual returns of around 10% — much higher than the average interest that CDs offer. 

You might consider opening a high-yield savings account if you:

  • Need the flexibility to access your funds on a more frequent basis. 
  • Are working toward shorter-term savings goals and don’t want to lock away your money for an extended period of time (assuming that short-term CDs don’t appeal to you).
  • Don’t want to commit to a fixed interest rate because you’re concerned about losing out on potential earnings if interest rates rise. 

Bottom Line

Depending on the goals you’re trying to accomplish, either a CD or a high-yield savings account might be a better fit than the other. Then again, no one lives in a vacuum. You could be trying to reach multiple financial goals at once. If that’s the case, you might benefit from opening both types of accounts. 

Just as you probably have a checking and a savings account, there’s no harm in having both a CD (or multiple CDs) and a high-yield savings account at the same time. When you have both types of accounts, you can use them to store different portions of your overall savings portfolio in each.

While we work hard on our research, we do not always provide a complete listing of all available offers from credit-card companies and banks. And because offers can change, we cannot guarantee that our information will always be up to date, so we encourage you to verify all the terms and conditions of any financial product before you apply.

Michelle Black
Michelle Black
Michelle Black is founder of CreditWriter.com and HerCreditMatters.com. Michelle is a leading credit card journalist with over a decade and a half of experience in the financial industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting, small business, and debt eradication. Michelle is also a certified credit expert witness and personal finance writer.

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