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Is a 12-month CD a good idea?

A 12-month CD could be a good idea for savers considering ways to earn more interest on their money. Getty Images

Certificates of deposit accounts, otherwise known as CDs, have historically offered savers a reliable way to protect their money. But rates on these types of accounts haven't always been consistent, offering little to no incentive for savers to lock away their money. The last 18 months, however, have changed that understanding. Interest rates on many CDs are now above 5%, with the potential to surpass 6% not as unrealistic as it once seemed.

Against this backdrop — and with lingering inflation hurting the bottom line — some savers may be exploring their CD options. With terms on these accounts ranging from a few months to a few years, many have settled on the one-year mark to judge the account's overall value. But is a 12-month CD a good idea? Or would savers be better served by the alternatives?

Start by exploring your CD account options here to see how much more you could be earning.

Is a 12-month CD a good idea?

There are two types of CD terms: long-term (which lasts more than one year) and short-term (which is 12 months or less). The latter CD type has some significant advantages in today's rate environment, which may compel savers to view it as a good idea. Specifically, a 12-month CD can offer:

Higher interest rates

Historically, CDs with longer terms had higher interest rates. It's easy to understand why — you were leaving your money undisturbed with the bank for an extended period, thus incentivizing the bank to pay you a competitive rate to keep it there. But the volatility of today's market has made it difficult to predict the long-term rate environment. Inflation could stay elevated alongside the interest rates meant to combat it. Or it could drop soon and rates could level off, too. This uncertainty has caused rates on short-term CDs to increase, generally (but not always) making them more attractive than their long-term counterparts.

It's not always the case and you may find some exceptions to the rule but in general, in October 2023, the higher interest rates are more likely to be found with CD terms of 12 months or less.

Explore your short-term CD options here to learn more.

More flexibility

Because your money won't be locked away for an extended period of time, 12-month CDs inherently come with more flexibility. This could appeal to those who don't want to part with their funds long-term. Or, it could be attractive for those who think additional interest rate hikes are on the horizon and want to be poised to take advantage when that happens. It can also help those who want the extra interest on their money but just want to experiment with a CD in today's market. Either way, a 12-month CD has much more flexibility than many other lengths.

A lower likelihood of being penalized

CD accounts all come with penalties for withdrawing your funds early. This is usually a percentage of the interest you've earned to date, although each bank and lender has its own threshold. But if you have a 12-month CD, the chances that you will need those funds early is much lower than it would be if you had a CD with a multiple-year term. 

One of the major benefits to opening a CD is the higher interest rate. So don't lose that by withdrawing your funds early. By opening a 12-month CD now, you'll have a lower likelihood of being penalized on the interest earned.

The bottom line

Everyone's personal financial situation is different. That said, there are some compelling reasons for many people to open a 12-month CD today. It can be a good idea to simply earn the elevated interest rate many accounts come with. But it's also smart to pursue due to its flexibility (relative to other CD terms) and the lower chance of being penalized for withdrawing your funds early. For all three of these reasons, a 12-month CD could be a good idea for you now. Get started here today!

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