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The big advantage of a one-year certificate of deposit (CD) is that instead of locking up your funds for 12 months, you can earn a higher yield than a savings or money market account. The relatively short term of a one-year CD makes it an attractive option for savers who want immediate access to money for planned purchases or new investments.
CDs typically earn a fixed annual percentage yield (APY), so you know exactly how much money you’ll have in your account at the end of the term. Here’s an example of investing $2,500 in a one-year CD in an account that pays the national average rate, a competitive rate, and the prevailing rate earned by a large brick-and-mortar bank. Here’s how much money you’ll earn if each of these three CDs is completed in 12 months.
| 1 year CD type | Typical APY | $2,500 in interest after 1 year | Total CD amount after 1 year with starting deposit of $2,500 |
|---|---|---|---|
| CDs that pay competitive rates | 4.75% | $118.75 | $2,618.75 |
| CDs that pay the national average | 1.74% | $43.50 | $2,543.50 |
| CDs from major brick-and-mortar banks | 0.03% | $0.75 | $2,500.75 |
Prices are current as of October 2, 2024.
Comparison of the highest CD audience rating and the national average
The national average one-year CD rate has been somewhat stable since September 2023, increasing or decreasing by only a few basis points. Currently, the average return on 1-year CDs nationwide is 1.74%, which is certainly better than the interest rates you can get on traditional savings accounts at major banks and credit unions. And it’s even better than the return you’d get on a CD sold at the same brick-and-mortar store for a year, which is currently about 0.03%. For example, Chase’s standard CD pays even less, at 0.01 percent with all terms.
However, this national average is not as high as the one-year CD interest rates offered by online banks, which require covering physical building costs and other overheads faced by some large traditional banks. do not have. For example, dozens of banks and credit unions now offer one-year CDs that pay an APY of 4% or higher. The highest APY currently available is close to 4.75%.
Factors that can affect CD returns
- Deposit amount: Regardless of the rate you pay on your CD, the more money you deposit, the more interest you’ll end up earning. Some banks require a minimum deposit amount for CDs, which can range from $50 to $2,500 or more.
- AP: Often referred to simply as yield or interest rate, APY tells you how much money your bank account earns in one year. The higher the APY, the more interest you earn.
- CD period length: CD APYs tend to vary depending on the length of the term, typically ranging from 3 months to 5 years. The longer the term, the more time your money will have to earn interest. Longer terms can sometimes result in higher prices, but this is not always the case. For example, the national average for one-year CD is currently 1.74 percent, while the national average for five-year CD is only 1.42 percent.
1 year CD and savings account
Currently, the best online savings accounts pay close to 5% APY. When choosing between a one-year CD and a savings account, here are some things to consider.
liquidity: If you are likely to need funds for emergencies or other expenses before the 12 months are up, you may want to choose a savings account. This is because while you can withdraw money from a savings account at any time, withdrawing money from a CD before the term ends typically incurs an early withdrawal penalty.
Fixed or variable rate of return: Interest rates on savings accounts can change at any time, but interest rates on CDs are usually fixed from the beginning. If you think interest rates are going to drop in the coming months, you may decide that a CD is a better choice. Conversely, in a rising interest rate environment, sticking with a savings account may be a wise choice.
conclusion
One-year CD rates can vary widely from bank to bank, with larger banks often offering lower yields and online-only banks typically paying much higher APYs. It’s helpful to shop around for the best rates and use a CD calculator to determine how much your CD will be in your account when it matures in 12 months.
–Freelance writer Mallika Mitra Contributed to updating this article.
