CD interest rates are set by the bank or credit union, not by the government, and they change based on what the Federal Reserve does and how much money the institution wants to attract
The interest rate on a certificate of deposit is the percentage return you earn on the money you deposit. Banks and credit unions decide their own CD rates — there is no single "the" rate. What you receive depends on three things: the institution you choose, the length of time you lock your money away (called the term), and the current interest rate environment set largely by Federal Reserve policy.
When the Federal Reserve raises its benchmark interest rate, banks typically raise CD rates because they have more money available to lend and less need to attract deposits. When the Fed lowers rates, CD rates fall. Within that environment, individual institutions compete for deposits by offering higher or lower rates than their competitors. A bank with excess deposits might offer 4.00% on a one-year CD while another bank offers 4.75% for the same term.
The rate you see advertised is the annual percentage yield, or APY. This is the total return you will earn in one year, including the effect of compounding (when interest earns interest). It is always higher than the straightforward interest rate because of how frequently the bank adds interest to your account.
Key Takeaways
- CD rates vary by institution and term length; you must compare rates across banks to find the best option for your situation.
- Longer CD terms usually pay higher rates than shorter ones, though this relationship sometimes reverses during economic shifts.
- The Federal Reserve's interest rate decisions influence all CD rates, but individual banks set their own rates within that environment.
- The rate quoted to you is the APY, which includes the effect of compounding and represents your total annual return.
- Your rate is locked in for the entire term; if rates rise after you open the CD, you cannot change your rate without paying an early withdrawal penalty.
How term length affects the rate you receive
Longer terms almost always pay higher rates than shorter ones. A three-month CD might pay 4.50% APY while a five-year CD from the same bank pays 4.85% APY. Banks offer this premium because they want to lock your money in for longer, reducing their uncertainty about future interest rate movements.
The difference between short and long terms can be significant. During 2024, some banks offered one-year CDs at 4.50% but five-year CDs at 5.00% or higher. That extra 0.50% compounds over five years and represents real additional earnings on your principal.
Occasionally, the relationship reverses — a one-year CD pays more than a five-year CD. This happens when the market expects interest rates to fall. Banks anticipate they will need to offer lower rates in the future, so they offer competitive rates now for longer terms to lock in deposits before rates drop. This situation is unusual and typically signals economic uncertainty.
Where to find current CD rates
You can see CD rates directly on bank and credit union websites. Most institutions display rates for common terms (three months, six months, one year, three years, five years) on their homepage or in a dedicated savings section. The rate shown is what you would receive if you opened that CD today.
Comparison sites like Bankrate, DepositAccounts, and the FDIC's National Rates and Rate Caps table let you see rates across many institutions at once. These sites update daily or multiple times per day. Using a comparison tool takes minutes and can show you the difference between a 4.50% rate and a 5.10% rate — a meaningful gap if you are depositing $10,000 or more.
Credit unions often pay slightly higher rates than banks because they are member-owned and return profits to members rather than shareholders. If you belong to a credit union, check their CD rates even if you have not used them before; the difference can be worth the effort to open an account.
What happens to your rate if interest rates change
Once you open a CD, your rate is fixed for the entire term. If the Federal Reserve raises rates the day after you open your CD, your rate does not change. You are locked in at the rate you agreed to when you made the deposit. This is the trade-off of a CD: you get certainty about your return, but you lose the ability to benefit if rates rise.
If you want to access your money before the term ends, you must pay an early withdrawal penalty. This penalty is set by the bank and varies widely — some charge three months of interest, others charge six months or more. A few banks charge a flat dollar amount. You should always read the CD agreement to see what penalty applies before you deposit money.
The penalty can be substantial. If you deposit $25,000 in a five-year CD at 5.00% APY and withdraw after one year, you might owe a penalty equal to six months of interest — roughly $625. You would receive your principal plus nine months of interest, a net loss compared to what you would have earned if you had left the money alone.
How banks calculate and pay your interest
Banks calculate interest using the APY you agreed to and your principal balance. The calculation happens automatically; you do not need to do anything. Interest is usually compounded daily, meaning the bank adds a small amount of interest to your account each day, and that interest then earns interest itself.
Interest is credited to your account on a schedule set by the bank — often monthly or at maturity (when the CD term ends). Some banks pay interest monthly; others pay it all at once when the term expires. You can usually choose whether to have interest deposited into the same CD (which extends your balance) or transferred to a linked checking or savings account.
The amount you receive is may provide by the bank's contract with you. Unlike stocks or bonds, the return does not fluctuate. You know exactly how much you will have when the term ends, assuming you do not withdraw early.
Special CD types and their rates
Most banks offer standard CDs with fixed rates and fixed terms. Some also offer variations that affect the rate you receive. A bump-up CD lets you request a rate increase once during the term if rates rise; these typically pay slightly lower starting rates than standard CDs because of this option. A no-penalty CD lets you withdraw without a penalty; these pay lower rates because you have flexibility the bank does not have.
A step-up CD has a rate that increases at set intervals — for example, 4.50% in year one, 4.75% in year two, and 5.00% in year three. These are useful if you expect rates to rise and want to benefit partially without locking in a single rate for the full term. The starting rate is usually lower than a standard CD for the same term.
Some credit unions and banks offer promotional rates for new customers or for deposits above a certain amount. These rates are temporary and higher than the standard rate. If you are comparing institutions, check whether a high rate is promotional (lasting a few months) or permanent (lasting the full term).
Comparing CD rates across institutions
| Term | Typical Rate Range (2024) | What affects your actual rate |
|---|---|---|
| 3 months | 4.25% to 4.75% APY | Bank competition, promotional offers |
| 1 year | 4.50% to 5.10% APY | Federal Reserve policy, deposit size |
| 3 years | 4.60% to 5.15% APY | Bank's funding needs, term length |
| 5 years | 4.75% to 5.25% APY | Long-term rate expectations, institution type |
The ranges above show what was common in 2024, but rates change constantly. The specific rate you receive depends on which institution you choose and when you open the CD. A difference of 0.50% APY on a $50,000 deposit over five years means roughly $1,300 in additional earnings — enough to justify spending an hour comparing rates.
When you compare, look at the APY (not the straightforward interest rate), confirm the term length matches what you want, and check the early withdrawal penalty. Some banks advertise a high rate but charge steep penalties; others offer lower rates but more flexibility. Your choice depends on whether you are certain you will leave the money untouched for the full term.
Frequently Asked Questions
Can a bank change my CD rate before the term ends?
No. Once you open a CD, your rate is locked in for the entire term. The bank cannot lower it, and you cannot raise it unless the CD has a bump-up feature that lets you request an increase once. If rates rise significantly, you are stuck with your original rate unless you withdraw early and pay the penalty.
Why do some CDs pay more than others for the same term?
Banks set their own rates based on how much money they need to attract and what they expect interest rates to do. A bank with excess deposits might offer lower rates; one that needs deposits might offer higher rates. Credit unions often pay more than banks. Promotional rates also vary — a bank might offer 5.25% for new customers but 4.75% for existing ones.
Is the APY the same as the interest rate?
No. The APY includes the effect of compounding — when interest earns interest. The straightforward interest rate is lower. Banks must show you the APY by law, so always use the APY when comparing CDs. It represents your true annual return.
What happens to my CD rate if the Federal Reserve cuts rates?
Your rate stays the same for the full term. You are locked in at the rate you agreed to. However, when you renew the CD at maturity, the new rate will reflect the lower Federal Reserve rate, so you will earn less on the renewal unless rates have risen again.
Do I pay taxes on CD interest?
Yes. CD interest is taxable income in the year it is credited to your account. The bank will send you a 1099-INT form showing how much interest you earned. You report this on your tax return. Some people use CDs in retirement accounts (like IRAs) to defer taxes on the interest.