What Is a High-Yield Certificate of Deposit?

High-Yield Certificate of Deposit Explained in Less Than 5 Minutes

A woman walks with her phone.
•••

zamrznutitonovi / Getty Images

A high-yield certificate of deposit is a type of deposit account that offers a higher interest rate in exchange for you keeping your money deposited for a specific amount of time. Withdrawing your deposit before the agreed time could trigger an early withdrawal penalty.

Depositing money into a high-yield CD versus a traditional savings account may allow you to earn more interest. Learn more about how high-yield certificates of deposit work and what the alternatives are.

Definition and Example of High-Yield Certificate of Deposit

A high-yield certificate of deposit, or high-yield CD, is a type of savings account that pays higher interest on the money you've deposited.

  • Acronym: High-yield CD

For example, a high-yield CD may have a $500 minimum deposit requirement and pay 0.15% APY on terms of three, six, or nine months. You have the flexibility to deposit more than the minimum and choose your term based on the amount of time you're willing to leave your money untouched.

How High-Yield Certificates of Deposit Work? 

In exchange for agreeing to keep your money deposited for a specific amount of time, a high-yield certificate of deposit offers a higher interest rate than the national average rate. The higher interest rate allows you to earn more interest on your deposits compared to other types of deposit accounts such as savings accounts and traditional CDs.

For example, if a high-yield CD offers 0.55% APY, depositing $25,000 into a 12-month CD would allow you to earn $137.50 in interest when the CD matures. By comparison, the same amount deposited into a 12-month certificate of deposit or savings account offering 0.01% APY, would only allow you to earn $2.50 in interest.

When you open a CD, you choose how long you want to keep your money deposited, which is known as the “term.” Banks offer a variety of CD terms from three months to 10 years. Some banks structure high-yield CD rates in tiers based on the term length. 

For instance, a bank's lowest rate would be offered on the shortest term and the highest rate on the longest term. Generally, the longer you keep your money deposited, the higher APY you'll receive—a four-year certificate of deposit would have a higher yield than a 12-month CD.

In general, you cannot make additional deposits to your high-yield CD after you open the account.

You may have to pay an early withdrawal penalty if you withdraw your deposit before the CD matures. 

High-yield certificates of deposit may be callable, which means the bank can terminate the CD before it matures. You'll receive your deposit and interest earned up until the call date, but you'll miss the opportunity to continue earning for the remainder of the term. You can, however, deposit your money into another CD at market rates.

High-yield CDs from banks are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA) if you purchase a CD through a credit union. This coverage protects your deposits from losses if your bank or credit union fails.

Since FDIC and NCUA coverage limits include all deposit accounts you own with one bank or credit union, your high-yield CD coverage could be impacted by other accounts you have at the same bank or credit union.

Alternatives to High-Yield Certificate of Deposit

If you like the idea of earning more interest on your deposits, but you're not enthused about keeping your money locked away for an extended amount of time, you have some alternatives.

High-Yield Savings Account

A high-yield savings account offers a higher interest rate than a traditional savings account, but less than a high-yield CD. With a savings account, your deposit isn't locked in, so you have more flexibility to access your funds at any time without penalty. You can also make additional deposits to your savings account to increase your ability to earn interest.

Money Market Account 

A money market account gives you more access to your deposits—some money market accounts have checking account features—but the minimum deposit requirements could be higher. You're not locked into an interest rate, so your earning potential could change over time as market rates change.

Key Takeaways

  • A high-yield certificate of deposit pays higher interest when you keep your money deposited for a specific amount of time.
  • Longer-term high-yield CDs typically have higher interest rates.
  • Withdrawing your deposit before the end of the term may result in an early withdrawal penalty.
  • Alternatives give you more flexibility to make withdrawals, but offer lower interest rates on your deposit.

Article Sources

  1. Consumer Financial Protection Bureau. "The Interest Rate Offered for CDs (Certificates of Deposit) Is Low. Is There Anything I Can Do About That?"

  2. Consumer Financial Protection Bureau. "What Is a Certificate of Deposit (CD?)"

  3. Federal Deposit Insurance Corporation. "Deposit Insurance FAQs."