What is a CD, and when does it make sense?

A certificate of deposit is a bank or credit union deposit that pays a fixed interest rate for a fixed term, commonly three months to five years, in exchange for leaving the money untouched. It carries the same FDIC or NCUA insurance as a savings account. The rate is usually higher than a standard savings account and locked for the full term, which is the point: you trade access for certainty. Withdrawing early triggers a penalty, typically several months of interest, that can exceed what you earned.

Whether a CD beats a high-yield savings account depends on the rate environment and your horizon. When rates are expected to fall, locking a rate is valuable; when they are rising, a CD leaves you stuck below what new accounts pay. The comparison worth making is against Treasury bills of the same term, which often pay similar rates, are exempt from state income tax, and can be sold before maturity without a fixed penalty.

Two structures reduce the lock-in problem. A CD ladder splits money across staggered terms so something matures regularly, giving periodic access and averaging the rate. No-penalty CDs allow withdrawal without forfeiture at a slightly lower rate. Read the maturity terms carefully, because most CDs automatically renew for the same term at the then-current rate unless you act within a short window, and that window is where people end up locked into a rate they never chose. Brokered CDs sold through investment accounts have their own rules, including no early withdrawal at all, only sale on a secondary market at whatever price it fetches.