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CD vs. High-Yield Savings: What’s the Difference?

CD vs. High-Yield Savings
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Updated May 15, 2024

If you can’t accept the risks of the stock market, you need to decide on the best place to keep your money while maximizing earnings. Many look to high-yield savings accounts (HYSAs) and certificates of deposit (CDs) as options.

Both offer safe and somewhat lucrative ways to grow savings with minimal risk. But which is right for you? The following breakdown will help you determine which is best for your current situation and savings goals.

Bread High-Yield Savings
Bread Savings 12-Month CD
APY*
5.15%
5.25%
Min. deposit
$100
$1,500
Monthly fee
$0
$0
View OfferView Offer

What is a high-yield savings account (HYSA)?

A high yield savings account is a savings account that typically offers a higher interest rate than a traditional savings account at a bank or credit union. Due to the rise in interest rates over the past few years, HYSAs have gained in popularity. Traditional banks and credit unions offer them, but the best rates can be found at online financial institutions.

How do you make money with a HYSA?

Customers who deposit funds into a high-yield savings account earn interest, which is expressed as an annual percentage yield (APY). While it depends on the institution, interest on many HYSAs is calculated daily and paid monthly.

Over time, APYs will fluctuate based on the interest rate set by the Federal Reserve, also known as the “Fed,” which is the central bank of the U.S. Banks tend to raise or lower their rates when the Fed does.

HYSA pros and cons

Pros:

  • Pays higher APY than a typical savings account
  • Insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA)
  • Low-risk growth
  • Highly liquid, with penalty-free withdrawals
  • Can be linked to a checking or other account for easy deposits or transfers

Cons:

  • Interest rates can fluctuate
  • Minimum balance requirements may apply
  • Small return for long-term savings
  • May require extra steps, such as transferring to a checking account, before making withdrawals
  • May only allow a limited number of withdrawals

What is a certificate of deposit (CD)?

A CD is an account with a fixed term (denoted in months or years) and an interest rate held at a bank or credit union. It generally offers higher interest rates than regular savings accounts, though it’s not always the case.

Think of a CD as an agreement between you and the institution: You leave your money on deposit for a set amount of time, and in return, the institution pays you a fixed amount of interest. Breaking the agreement by making an early withdrawal will result in a penalty, which varies by financial institution and the term of the CD.

For example, American Express charges a penalty of 90 days’ worth of interest for a CD with a term of less than one year but 540 days (about 18 months) for a CD with a term of five years or more. Ally Bank, on the other hand, charges 60 days of interest for a CD of two years or less but 150 days (about five months) for a CD of four years or longer.

How do you make money with a CD?

Like HYSAs, CD customers earn interest from the financial institution. Depending on the institution, interest can compound daily, monthly, quarterly, or even annually.

CD pros and cons

Pros:

  • Typically offers a higher interest rate than a HYSA or a regular savings account
  • Guaranteed rate of return
  • Available at most banks, credit unions, and online financial institutions
  • Low-risk way of growing funds
  • Insured by the FDIC and NCUA

Cons:

  • Funds are unavailable for the duration of the CD term
  • Possible penalty for early withdrawal
  • Usually does not allow additional deposits after opening
  • Not as potentially lucrative as investing in the stock market

HYSA vs CD at a glance: Key differences

HYSACD
Variable interest
Rates are usually fixed, though floating-rate CDs do exist
No fixed term
Fixed terms can be months or years
Doesn’t usually charge fees, although you may pay a fee if you exceed a transaction limit
No set-up fees
You can access your funds at any time
Penalty for early withdrawals
You can add funds to your account
Only an initial deposit allowed
FDIC/NCUA insured
FDIC/NCUA insured

Which pays more: CD or HYSA?

Generally, a CD will pay more than a HYSA because you are committing your funds for a set amount of time. HYSAs typically pay lower interest rates for the convenience of being able to access or withdraw cash at any time.

Nevertheless, some institutions, such as UFB Direct, offer HYSAs with interest rates that can compete with many CDs on the market today.

Bread High-Yield Savings
Bread Savings 12-Month CD
APY*
5.15%
5.25%
Min. deposit
$100
$1,500
Monthly fee
$0
$0
View OfferView Offer

When is a HYSA the best idea?

High-yield savings accounts are best for those who want a competitive return on their savings while prioritizing safety and liquidity.

When is a CD the best idea?

CDs are suitable for investors looking for safety, the predictability of a fixed return, with the willingness to lock up their funds in exchange for a more attractive yield.

TIME Stamped: CDs earn more but HYSAs offer better access to your funds

Both HYSAs and CDs offer low-risk ways to store cash and grow your savings. The best option for you depends on your time frame, savings goals, and liquidity needs.

Frequently asked questions (FAQs)

Should you lock your rate or keep your funds flexible?

If you need to spend your money soon, keeping it liquid in a HYSA is probably the best option, though the interest rate may fluctuate. If you don’t need the funds for a while, locking in a guaranteed CD interest rate will likely earn you more over time.

How high will savings and CD rates go this year?

Unfortunately, no one can predict what will happen to interest rates. In its March 2024 Monetary Policy Report, the Fed noted that it “has maintained the target range for the federal funds rate at 5-1/4 to 5-1/2 percent since its July 2023 meeting” and went on to say that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

Thus if the Fed doesn’t drop rates in the immediate future, it seems likely that CD rates won’t drop either, so it may be a good time to consider a CD for any funds you won’t be using soon.

How much does a $10,000 CD make in a year?

This depends on the APY. Barclays is currently offering a 12-month CD with an APY of 5.00%. Its website also has a calculator that you can use to determine your yield.

Here is what a 12-month Barclays CD will pay on $10,000 after one year, calculated using its online tool:

$10,000 (amount) X 5.00% (rate) X 1 (time) = $500.00

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