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A certificate of deposit (CD) offers a high fixed interest rate on your savings, generally in exchange for locking up your funds for a set term — typically between a few months and several years.

With CD rates topping 5%, it can be a good idea to take advantage of high interest rates, especially if you anticipate rates dropping in the near future. Before you open a CD account, however, it's important to understand your situation and what you're getting.

Here are some common mistakes people can make when using a CD and how to avoid them.

Mistake #1: Not Shopping Around for Rates

Thousands of banks and credit unions offer CDs, but they're not all created equal. While it may be tempting to go through your current financial institution, you may be leaving money on the table with a lower annual percentage yield (APY).

Take some time to research the best CD rates to ensure you're getting the most for your savings. You'll also want to check for minimum deposit requirements to ensure you can qualify for the account based on how much you plan to save.

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Mistake #2: Picking the Wrong Term

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CD rates can vary depending on which term you choose. Currently, the best CD rates are reserved for terms ranging from six to 18 months.

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CIT Bank Term Certificates of Deposit

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Annual Percentage Yield is accurate as of April 2, 2024. Interest rates for CIT Bank's term CDs are variable and subject to change at any time without notice

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Annual Percentage Yield is accurate as of April 2, 2024. Interest rates for CIT Bank's term CDs are variable and subject to change at any time without notice

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Annual Percentage Yield is accurate as of April 2, 2024. Interest rates for CIT Bank's term CDs are variable and subject to change at any time without notice

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That said, if you pick a term based solely on the APY it offers, you may run into some issues if you need that cash sooner — most banks and credit unions charge early withdrawal penalties if you take out money before your term expires.

On the flip side, if you pick a term that's too short, the original rate typically won't carry over to the new term. If interest rates have gone down in the meantime, you'll end up earning less interest.

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Mistake #3: Overlooking Penalties

Most CDs require you to hold your funds in the account until it matures. If you take money out too soon, you'll be subject to an early withdrawal penalty. But like other CD terms, penalties can vary depending on which financial institution you choose and the length of your CD's term.

For example, if your CD has a term of less than 12 months, you may be charged 90 days' worth of interest. Longer than that, it could be a full year's worth of interest or more. What's more, if you haven't earned enough interest in the account yet to cover the penalty, some financial institutions may take the difference from your principal balance, causing you to lose money.

Before you open a CD, make sure you understand the penalties for early withdrawal and avoid committing cash you may need before the account matures.

Mistake #4: Choosing the Wrong Type of CD

There are a few different types of CDs, some of which offer special features:

Standard CD

There are no special features with this type of CD. You'll deposit money and hold it until the account matures, with no change to your interest rate during that time. Early withdrawals typically incur penalties. Terms can range from one month to 10 years.

No-Penalty CD

As its name suggests, a no-penalty CD won't charge you a penalty if you need to withdraw your funds before the account matures. Terms are typically around 12 months or less, but some institutions may offer longer terms.

Step-Up CD

With this type of CD, your account's interest rate increases in regular intervals over the course of your term. For example, you may have a 28-month term, with a rate increase every seven months.

Bump-Up CD

If interest rates go up over time, a bump-up CD allows you to raise the interest rate on your account once during its term to take advantage of rising APYs.

Brokered CD

A brokered CD is offered by a brokerage firm instead of a bank or credit union. You may be able to get a term of up to 30 years with a brokered CD, and because brokers can hold accounts at multiple banks, you may enjoy a higher FDIC insurance coverage limit. You can also sell a brokered CD on the secondary market if you want your money before the account matures, but its value may go up or down based on market rates.

It's important to keep in mind that no-penalty, step-up, and bump-up CDs typically offer lower interest rates than standard CDs. However, you may be able to get a higher APY with a brokered CD than a CD offered by a bank or credit union.

Mistake #5: Forgetting to Withdraw at the End of Your Term

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After your CD matures, you'll typically get seven to 10 days to renew the account for another term or to withdraw your funds. Your bank or credit union is required by law to notify you ahead of the maturity date.

That said, if you forget or don't make a decision to withdraw in time, your financial institution may automatically roll over your funds into a new CD, forcing you to keep your money in the account longer than you planned or to take an early withdrawal.

Mistake #6: Not Diversifying Your Savings

While a CD can be a great way to earn a high APY on your savings, putting all of your money into one could cause problems if you experience a financial emergency.

As a result, it's a good idea to keep some of your savings in a high-yield savings account or money market account so you'll have cash easily accessible when you need it.

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Mistake #7: Playing It Too Safe With Your Cash

A CD offers a safe, guaranteed return on your money. But depending on your current financial situation and your goals, it may make sense to invest some of your cash instead of putting it in a CD.

While the stock market can be volatile in the short term, and there's a risk of losing some of your money, it can be a better place to put money for long-term needs and goals.

Bottom Line

Like other financial products, CDs come with a lot of advantages and disadvantages. If you're thinking about opening a CD account, make sure you understand your needs and goals, and take some time to research other options to ensure that you're getting the most out of your money.


Ben Luthi

Ben Luthi is a personal finance and travel writer and credit card expert. He has a degree in finance from Brigham Young University and worked in financial planning, banking and auto finance before writing full-time for NerdWallet and Student Loan Hero. Ben is now a full-time freelance writer and enjoys traveling and spending time with his two kids. His work has appeared in several publications, including U.S. News & World Report, USA Today, Money, Success and Slickdeals.