5 steps to choosing the right CD

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• Choosing the right CD term will likely depend on the timeline of your goals.
• Decide whether you want a traditional CD or a special type of CD.
• Review the CD early withdrawal penalties and know what your options are once the CD matures.

A certificate of deposit is a low-risk, interest-earning option that may ideal if you don't need immediate access to some of your savings.

If you've decided a CD is the best option for earning some interest on your money, you'll want to look at more than simply CD rates, though. Here's what you need to consider first to make sure you find the right CD for you.

1. Decide which type of CD is right for you

CDs vary between financial institutions. Below, you'll find the most common types of CDs found at banks and credit unions:

• Traditional CD/share certificate: A traditional CD (or share certificate if you're looking at credit unions) is what you'll find at most financial institutions. A CD is a type of savings account. It offers a fixed interest rate if you keep money in an account for an entire term. With a traditional CD, you'll only be allowed to deposit money when you open a CD or once it matures.
• Step-up CD: A step-up CD is a type of certificate of deposit where a financial institution will increase the interest rate at least once before the end of its term. Step-up CDs offer a guaranteed increase on a specific date, and the bank's website will usually specify when the rate change will occur. A few financial institutions that offer step-up CDs are US Bank, TD Bank, and VyStar Credit Union.
• Bump-up CD: A bump-up CD also allows you to get a higher interest rate before the end of a term. However, instead of receiving a guaranteed rate increase, you're only allowed to request a rate increase if the financial institution raises its rates on CDs before the end of your term. Synchrony Bank and Bethpage Federal Credit Union are two financial institutions with bump-up CDs.
• No-penalty CD: This type of CD will not charge you an early withdrawal penalty if you need to take out some money from the account before the end of a term. Ally, Marcus, and America First Credit Union are a few banks and credit unions with no-penalty CDs.

Once you know which type of CD you want, you may begin to narrow down your options by considering which term might be best for you.

2. Determine which CD terms fit your goals

CD terms can range from as short as seven days to as long as 10 years, depending on the financial institution. When you're trying to select a CD term, you'll want to have a clear idea of how long you can keep the money in an account without needing to take it out.

"I would start with the thought process that I have these dollars sitting in a checking account or savings account. What's it for? When do I plan on using it? How much will that purchase or investment require? Based on those answers, then you can much better evaluate whether a CD makes sense, and if so, what duration of CD," says Kevin Mahoney, a CFP® professional and the host of Financially Well, a finance podcast for Millennials.

CD laddering is also often used as a strategy if you want to take advantage of competitive interest rates, but you don't want to deposit all your money in a long-term CD. With a CD ladder, you'll open multiple CDs of different terms. For example, you can open a 1-year CD, 2-year, and 3-year CD at all once, and split your money between these three CDs.

One of the primary benefits of creating a CD ladder is that it offers more flexibility. For example, if interest rates on CDs go up, you may be able to take advantage of higher rates once you're shorter-term CDs mature. If you need access to your money sooner than you anticipated or worry about early withdrawal penalties, CD ladders may also be helpful because you'll be able to access a part of your savings once each term ends.

3. Compare different financial institutions

Selecting the right financial institution can also make a big difference in getting strong CDs. 

Online banks or credit unions will usually offer the highest CD rates. Meanwhile, national banks usually offer low interest rates that are either on par with or lower than the average CD.

You'll also want to keep an eye on the minimum amount needed to open a CD. The minimum opening deposit varies from bank to bank. Some financial institutions will let you open an account with $0, but generally, at least $1,000 is needed to get a CD.

4. Review CD early withdrawal penalties

Although CDs do not have monthly service fees like standard savings accounts or money market accounts, you do want to be mindful of early withdrawal penalties. An early withdrawal penalty is a fee for withdrawing money from your account before the maturity date.

"If you want to earn the rate that the CDs are offering, you have to keep it in that CD for a certain amount of time. I think that's the variable that's most likely to trip people up," says Mahoney. "Those numbers can be very appealing on the surface, but you have to think through when you're going to need the money and whether the terms of any particular CD actually work for your circumstances."

5. Know what happens when a CD matures

You may also want to consider what happens when a CD matures. For example, does your CD automatically renew? If it does, you'll want to see how long the grace period is for making changes to the account before it renews. During the grace period, you can withdraw any amount of money from a CD without facing penalties. You may also choose to deposit more money into a CD and let it renew for another term.

You may also want to know the process for closing a CD at a financial institution. Some banks let you close a CD online, while others may require you to call customer support instead. 

The bottom line

Before you get a CD, narrow down your options by figuring out the type and term of the CD you want. CDs aren't as accessible as other types of savings accounts, so bear in mind how long you can keep money in the account without potentially facing early withdrawal penalties. Also, make sure you know what steps you need to take once your CD matures.