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Average rates on certificates of deposit (CDs) continue to climb, with rates for most terms higher than they were a week ago.
1-Year CDs This Week
The typical APY, or annual percentage yield, on popular one-year CDs is 1.37%, up from 1.32% last week. One month ago, yields on one-year CDs were averaging just 1.10%.
CDs are savings accounts with fixed interest rates that are generally higher than those paid on other savings products. The catch is you must hold your money in the account for a certain period of time, called the CD’s term. The longer the term, the better the yield.
3-Month, 6-Month, 9-Month CDs This Week
On CD terms shorter than one year, rates are mixed this week.
APYs on three-month CDs are averaging 0.32%, unchanged from last week. One month ago, the typical three-month CD yield was 0.17%.
For six-month CDs, this week’s typical APY is 0.91%, up from last week’s 0.88%. A month ago, rates for the six-month term were averaging 0.68% APY.
The average yield on a nine-month CD this week is 0.90%, an increase from last week’s average of 0.78%. One month ago, nine-month CDs had an average APY of 0.51%.
18-Month CDs This Week
CDs that run for a year and a half this week are going for an average APY of 2.02%.
That’s up from 1.96% a week ago. Last month at this time, the typical 18-month CD had an APY of 1.73%.
Rates on CDs are commonly expressed as APY and not simple interest because an APY more accurately expresses a CD’s annual return. It factors in compound interest, which is earned by both your deposit, or principal, and by the interest you’ve already accrued.
5-Year CDs This Week
The average APY on a five-year CD—a favorite choice among investors seeking higher yield—has climbed to 1.88%, from 1.83% last week. Rates also are higher than a month ago, when five-year CDs were offered for an average 1.72% APY.
You can face sharp penalties if you make a withdrawal from a CD before it has “matured,” or reached the end of its term. Pull your money out of a five-year CD too soon, and you could easily lose a full year’s worth of interest.
2-Year, 3-Year and 4-Year CDs This Week
For other multiyear CD terms, rates this week are higher.
APYs on two-year CDs are averaging 1.58%, up from 1.56% last week. One month ago, the typical two-year CD yield was 1.31%.
On three-year CDs, this week’s average is 1.70% APY, up from last week’s 1.64%. A month ago, rates for the three-year term were averaging 1.49% APY.
And the average rate on a four-year CD this week is 1.78% APY, an increase from last week’s typical APY of 1.75%. One month ago, four-year CDs were yielding an average 1.63%.
How Do CDs Work?
Once you choose a financial institution that’s offering a CD rate and term in sync with your financial goals, you buy your CD. That is, you make a lump-sum deposit to open the account, and that money becomes your CD’s principal.
But before you make your purchase, be certain you understand your CD’s early withdrawal penalty. The penalties vary by CD term and can bite into your principal if you’re not careful.
As soon as you deposit your principal, the clock starts ticking on your timed investment. You’ll earn the fixed interest rate for the length of the CD’s term. As with other deposit accounts, the bank or credit union will send you regular statements keeping you informed about the interest your principal is earning.
Avoid Penalties With a CD Ladder
Longer-term CDs are attractive for their higher yields, but they require you to keep your hands off your money for a longer period or face penalties. Building a CD ladder is a way to enjoy the benefits of a longer term while having access to more of your cash.
You ladder your investment by spreading your money across different CDs with varying terms. You put a portion into short-term CDs, and sock away another portion into longer-term CDs.
As the shorter-term CDs mature, you reinvest that money into new five-year CDs. Eventually, you’ll have five-year CDs maturing each year. Your investment will feel more liquid, and you’ll earn higher returns.
To find the best CD rates, you’ve got to be willing to shop around. Competition in the CD market is fierce among banks and credit unions, and they offer attractive yields to win your business. Comparison shopping is vital before you purchase any bank CD or credit union share certificate.
