While a long-term CD can help you weather periods of low interest, it may not be the best place to park your extra cash in a rising rate environment like today.
Right now, the best rates you’ll find for three-year certificates of deposit are over 3.80% APY. That’s not much higher than rates on much more liquid options like high-yield savings and money market accounts. And experts expect rates to only go higher, as the Federal Reserve continues federal interest rate hikes (and banks follow suit).
“In most cases, if we’re in an increasing interest rate environment, those longer-term CDs just don’t make as much sense because you are locking in that rate and decreasing your flexibility,” says Hannah Szarszewski, founder of Blue Mountain Financial Planning, a virtual firm based in Melissa, Texas. The temptation is understandable, she says, but can be short-sighted. On average, a one-year CD has a 4.23% APY, which is higher than longer terms right now.
Here’s more about the best three-year CD rates now, and how experts say you can best utilize CDs in a rising rate environment — or when to decide to go with a different account:
Best CD Rates for January 2023
|Bank||3 year apy||Minimum Deposit|
|Bread Savings (formerly Comenity Direct)||4.50%||$1,500|
|Goldman Sachs Bank USA||4.00%||$500|
|Live Oak Bank||2.00%||$2500|
|American Express National Bank||1.15%||$0|
Note: The APYs (Annual Percentage Yield) shown are as of January 03, 2023. The APYs for some products may vary by region.
What is the Average 3-Year CD Rate Right Now?
The national average interest rate on three-year CDs is currently just 0.90% APY, according to the Federal Deposit Insurance Corporation (FDIC).
At 1.45%, the average 3-year CD rate according to the weekly national deposit index survey conducted by Bankrate is higher. Like NextAdvisor, Bankrate is owned by Red Ventures.
But many online banks are offering much higher APYs for 3-year CDs. Based on our analysis of best CD rates, the average for three-year CD terms is 3.80%.
Should I Choose a 3-Year CD?
If you lock your money into a 3-year CD right now, you could miss out on a bigger return in the coming weeks or months as interest rates climb, experts say. Plus locking away your money could risk losing your spending power, since rates are still behind inflation.
Three- and five-year CDs may seem appealing because you can guarantee a higher interest rate if rates fall in the next year, but the downside doesn’t make it worthwhile as rates rise, says Szarszewski.
If you know you won’t need the cash for a few years, consider investing in a brokerage account (which comes with more risk, but potentially higher returns) depending on your investment strategy and financial goals.
Consider a CD ladder strategy instead of opening a single long-term CD while rates rise. For example, you could open multiple 1-year CDs over several months that all mature annually. If rates rise during that time, you’ll be able to take advantage as you build your ladder. Depending on where rates are at the end of each term, you’ll have the opportunity to choose the best option for rolling over your earnings as the CDs mature.
3-Year CDs Compared to 1-Year and 5-Year CDs
Compared to other short-term savings options, three-year CDs offer better rates than high-yield savings accounts and money market accounts today. But shorter term CDs and high-yield savings account rates are rapidly rising. Right now, many of the best 3-year CD rates are around 3.80% APY or higher. If you’re considering a CD, here’s how 1-year and 5-year options compare:
The best 1-year CD rates are around 4.23% APY, and require only a short time commitment. Plus, they offer more flexibility compared to locking in a 3-year or 5-year CD APY as rates continue to rise.
For many experts we’ve spoken to, that means these shorter terms are better options right now.
“The Fed has indicated that there will likely be further interest rate hikes this year,” says Szarszewski. “It likely means that purchasing shorter-term CDs right now is a reasonable strategy because we expect the interest rates to continue to rise.”
If 3-year CDs are too long to have your money locked away at a fixed rate, a 5-year CD is even tougher to justify in today’s rising rate environment. Even though rates on five-year CDs are slightly higher (many are above 4% APY), they require you to lock your money into a lower rate than you’ll probably be able to get in just a few months.
And since it will take five years for the CD to mature, you won’t have the option to take advantage of those higher rates. For long-term financial goals, consider investments with potentially higher returns, such as a diversified investment portfolio, or even inflation-based Series I Savings Bonds.
How to Open a 3-Year CD
You can open a CD online or in person at the bank you choose. Many of the highest interest rates right now are offered by online banks or online divisions of larger financial institutions.
Keep in mind that many CDs come with requirements for opening. Some may only need any deposit within a certain time period, while others require minimum deposits of $500, $1,000, or more.
When you’re ready to open an account, you’ll need your bank account and routing information from another bank to transfer money to your CD account. You’ll also need to provide personal information, such as name, email address, and Social Security number.
Before you open any new account, compare rates and requirements to see which CD is best for you, and weigh other savings account options that best align with your financial goals.
Will 3-year CD rates go up?
As the Federal Reserve increases the federal funds rate to level inflation through the rest of this year, rate increases for all CDs and other savings and investment options will likely continue, experts say.
What if rates go up while I have money deposited?
If rates go up while you have a CD open, you’ll be locked into that rate you already have until your CD matures.
What if I want to withdraw my money before 36 months?
If you want to withdraw your money before your three-year CD matures, you’ll pay a penalty on your balance. Remember to never store your emergency fund in a CD; instead, put the money in a place that’s easily accessible, like a high-yield savings account.