Short-Term vs. Long-Term CD: Which Do I Choose?

Certificates of deposit can help with your savings goals as long as you know how long you’ll need them. When getting one, do you want a short- or long-term CD? Or one in the middle?

Short-term CDs tend to refer to CDs for one year or less, mid-term CDs usually mean two- to three-year CDs, and long-term CDs usually describe four-year CDs and longer.

CDs, called share certificates at credit unions, tend to offer higher interest rates than savings accounts and require you to lock in your money for a set period, or term. CD terms typically range from three months to five years.

» COMPARE: See the best CD rates

The trick is to find a CD with the right maturity date for you. If your term’s too short, you might miss out on a higher rate available for another term. If your term’s too long, you may need the money prematurely and pay an early withdrawal penalty to get it. CDs can be great savings tools if the term works for you and you scout out the best rates. Here’s what to keep in mind when choosing a CD term length.

What is a CD term?

A CD term is the period of time a CD is opened, and chosen by a customer in advance. Standard CD terms start at three months and go up to five years, though there are some banks with CD terms as short as one month and as long as 10 years.

Short-term CDs (1 year or less)

Lower commitment, traditionally lower rates

• Best three-month CD rates

• Best six-month CD rates

• Best one-year CD rates

The shortest CD terms give you the most flexibility in accessing your funds. When a CD expires and you don’t need the money yet, you might decide to renew it once or multiple times within one or two years. And if you do withdraw early, the penalty tends to equate to a lower dollar amount than you would pay for breaking the seal on a long-term CD. (See more about CD early withdrawal penalties at a variety of banks.)

The main historical disadvantage to short-term CDs has been settling for lower rates compared with midrange and long-term CDs (the mid-2023 rates have been an exception). The national average rates are 1.52% annual percentage yield for a three-month CD and 1.84% APY for a one-year CD. You can find at least double those rates at online banks, but regardless, your money grows for a short while only and you’ll need to have a plan for what to do with those funds more quickly than for longer-term CDs.

Consider a no-penalty CD if you want a fixed rate and more flexibility. True to its name, there’s no cost if you withdraw before the term ends, typically in exchange for slightly lower rates than regular CDs offer. Common term lengths for competitive no-penalty CDs tend to be 11 months and 13 months. (If you’re curious, see our list of the best no-penalty CD rates.) Or, if you decide flexibility is more important than a fixed rate, check out the best high-yield savings accounts.

» Learn more about how CDs work

Midrange CDs (2-3 years)

Traditionally better rates, more discipline required

• Best three-year CD rates

Typically the longer the term, the higher the CD rate is. You can earn more interest than short-term CDs with terms longer than a year and up to three years. The national average rate for a three-year term is 1.35% APY, and you can find higher yields at some banks.

Midrange CDs can be handy for setting aside funds for a few years, whether that’s in a standard term such as two or three years or in a more unusual term such as 18 or 30 months (1.5 and 2.5 years, respectively). At some banks, you may run across promotional CD rates with short- to midrange terms and comparable or higher rates than what a bank offers for its long-term CDs.

Just be sure you won’t need to withdraw early. Penalties tend to cost several months’ worth of interest earned, which can be a blow to your savings. Having a separate emergency fund to cover three to six months of living expenses can help prevent the need to dip into a CD early.

Long-term CDs (4-5 years)

Traditionally best rates, more commitment required

• Best five-year CD rates

Four- to five-year CDs, and longer, tend to have the best rates you can find (mid-2023 rates have been an exception). Pledging to leave your money inaccessible for that long can be worth the commitment, especially if you can lock into a high APY before a falling-rate environment. The national average rate for a five-year term is 1.35% APY and you can find higher rates at some banks and credit unions.

Banks and credit unions may offer special options called bump-up or step-up CDs. These CDs can allow for the rate to increase once or twice during the term, which might be appealing if you think rates will rise during that time.

If you want guaranteed returns on retirement money and you don’t have a long time horizon until retirement, consider placing some funds into IRA CDs instead of standard ones. (See more about nine types of CDs.)

Penalties tend to be steepest for the longest terms, so be firm about your savings plan before committing.

» Where are rates going? Check historical CD rates to consider the trends

Build a CD ladder to bridge the gap

There’s a way to take advantage of the best parts of short-term and long-term CDs. If you want access to money frequently and the highest returns, consider a CD ladder. The strategy involves dividing up cash into multiple CDs of different terms.

Here’s how it works: Instead of putting, say, $10,000 into a five-year CD, put $2,000 each into a one-, two-, three-, four- and five-year CD. As each CD matures, reinvest the money in a new five-year CD, and before long you’ll have one five-year CD maturing each year. Or, if CD rates are dropping, you can choose to withdraw at the end of a term and invest elsewhere. Here are some other short-term investment options.

CDs have some of the highest guaranteed returns among bank accounts, but you also don’t want to lose out on higher-growth investment opportunities. If you have plenty of cash for daily needs plus a robust emergency fund, consider an online brokerage account. These financial products come with more risk; unlike CDs, they’re not insured by the Federal Deposit Insurance Corp., but they can lead to better returns. For guidance, check out NerdWallet’s online stock brokers for beginners.

» Not sure of the amount for a CD? Here’s how to choose your CD deposit