Certificates of deposit (CDs)—called share certificates at a credit union—are high-end savings accounts. They generally pay interest at a higher rate than other bank or credit union accounts, so it should come as no surprise that there are some strings attached.
What makes CDs different from regular savings accounts is that they’re time deposits. That means that when you open a CD you agree to commit your money for a specific term, or period of time. You also agree that if you withdraw money from the CD before it matures when the term ends, you’ll forfeit some or all of the interest you would have earned.
Typical terms include six months, a year, two and a half years, and five years. But the term may be any period you and the bank agree on. The longer the term, the slightly higher the interest you may earn. There may be a minimum deposit—often $500—and some banks may pay slightly higher rates for large deposits.
What you actually earn depends on whether the account pays simple or compound interest. Simple interest is calculated annually on the amount you deposit. With compound interest, which can be paid daily, monthly, or quarterly, the interest is added to your principal to form a new base on which you earn the next round of interest.
How can you tell whether interest is simple or compound? If the nominal rate and the APY are the same, you’re earning simple interest. If the APY is higher, the interest is compound.