How to Open a CD (Step-by-Step) | A Complete Guide

Written by Kim PinnelliUpdated: 29th Sep 2021
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If you’re looking for an investment with returns larger than a savings account but with more reliability than the stock market, consider opening a certificate of deposit (CD).

CDs are FDIC-insured, pay APYs higher than savings accounts, and give you a nice return on your investment with no risk.

If you want to keep your money (or some of it) somewhat liquid but want at least a small return, check out this guide on how to open a CD.

How to Open a CD (Step-by-Step)

Don’t let opening a CD overwhelm you – it’s a lot simpler than it sounds. It’s like a ramped-up savings account with a few twists.

Here’s how to start.

#1. Research Your Options

  • CD Terms: Decide how long you want to tie up your money. The longer the term, the higher the CD rate. Be careful, though. Don’t take a CD with a maturity longer than you can handle. Most have early withdrawal penalties that defeat the purpose of the higher APY.
  • CD Rates: The more you invest, and the longer you invest it, the higher the CD rates you’ll earn. Again, be careful with the CD you choose. Only choose the one you can leave untouched until maturity.

No-Penalty CDs

If you aren’t sure about tying up your funds, consider a liquid CD. This is an ‘open investment’ with no penalty for early withdrawal. In exchange, you’ll earn lower CD rates.

High-Yield CDs

High-yield CDs have longer maturity dates but also higher CD rates. Only choose this option if you can leave the funds untouched for the duration of the CD. If you withdraw early, you’ll pay a penalty.

#2. Know Your Time Frame

Like I said above, your time frame is a crucial piece of the puzzle. If you have only 3 months until you need the funds – choose a 3-month CD.

If you have money, you’re saving for a longer-term goal, like 5 years down the road, choose a CD with a much longer maturity date and earn a higher interest.

#3. Apply Online

Start your research online. Most major banks and financial institutions advertise their CD rates and terms on their website.

Once you find the bank with the right options, apply online and transfer funds electronically to fund it.

>> More:Best CD Rates

#4. Documents You’ll Need

Banks need information about you to prove you are opening an account in your own name and

  • Two Forms of Identification: Proof you are who you say you are with two forms of official ID, such as a driver’s license and passport
  • Residential Address: Proof of your residential address that must be in the United States
  • Contact Information: Phone number and email address
  • Social Security Number (SSN): Your Social Security number for tax reporting purposes
  • Payment Details: Information about the account you’ll use to fund the CD

#5. Interest Payments

You have a few options when receiving your interest payments. To make the most of it, opt to receive your interest at maturity, this way, your interest earns interest.

But if you want the cash flow, choose from the following:

  • Monthly: Receive monthly payouts of the interest earned for the month
  • Quarterly: Receive payouts 4 times a year
  • Annually: Receive interest payout once a year on the same date each year

#6. Make Initial Deposit

If you open a CD online, you can make your deposit electronically. Link your funding accounts, such as a checking or savings account, at any bank and transfer the funds.

#7. Sit Back, Relax, & Watch Your Money Compound

After you fund the account, you sit back and watch your money grow. If you chose to let the interest remain in the CD, your funds will compound faster, and you’ll earn more money.

How to Choose the Best CD Rate

Now that you know how CDs work, choose the best CD rate by first determining the term. Then you can compare CD rates with the same term.

If you need a liquid CD, you’ll earn lower CD rates than if you choose a finite term.

Narrow down your options, look at the fees and fine print, and choose the CD that will cost you the least and that you will be able to meet the requirements. We recommend checking out online banks and seeing what they have to offer. 

Can You Remove Money from a CD?

You can remove money from a CD, but I don’t suggest it. Most (if not all) banks charge a fee equal to a specific amount of interest to withdraw the funds early.

Always read the fine print, so you know the early withdrawal penalty. They can range from a few days of interest to 12 months of interest.

What is the Best CD?

The best CD is the one that’s right for you. Look at your timeline and your goals.

Don’t commit to a long-term CD that will put you in financial distress or cause you to withdraw the funds early.

Choose the one that meets your goals AND pays the highest APY out of your choices.

>> More: What is a CD Ladder? 

Bottom Line: How to Open a CD

Knowing how to open a CD is important – everyone should have a couple, even if you invest in the market.

CDs diversify your investment, reduce your overall risk while still providing you with a decent return.

Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.