3 Signs You Shouldn't Open a CD, Even With Rates at 5.5%

Certificates of deposits (CDs) can be a great choice when you want to maximize the interest you earn on your savings. With a CD, you agree to keep your money in the bank for a specific amount of time, known as a term. Because you're agreeing not to touch your money during the CD term, you can often earn more interest than you'd get with a high-yield savings account.

Some of the best CD rates we've seen lately are as high as 5.50%. Plus, CDs are extremely low risk because they're covered by the Federal Deposit Insurance Corporation (FDIC) for at least $250,000 per institution per depositor.

While CDs have a lot of benefits, there are certain times a CD isn't the right place to keep your money. Let's look at three situations where you shouldn't even consider opening a CD.

1. You have high-interest credit card debt

A CD that pays northward of 5% is certainly generous. But if you have a credit card balance that's accruing interest, pay it off or look into the top balance transfer cards, many of which offer a temporary 0% APY, before you open a CD.

A 5.50% APY pales in comparison to the average credit card APY. As of late 2023, the average credit card APY for accounts that accrued interest was nearly 23%, according to Federal Reserve data. You'll save far more money tackling high-interest debt than you can earn through a CD.

2. You don't have an emergency fund

You generally want to aim for an emergency fund that can cover three to six months' worth of expenses in case things go wrong, i.e., you lose your job or you're hit with a big home repair or medical bill.

A CD isn't a great place for emergency savings because you're agreeing not to withdraw your money for the duration of the term. If you need your money before the term is up, you'll pay an early withdrawal penalty.

A better place for your emergency fund is a high-yield savings account, since you'll have access to your money whenever you need it (though some banks may limit your monthly withdrawals). Only put money in a CD if you're confident you won't need it until the end of the term.

3. You're investing retirement money

A low-risk return of 5% or more on your money certainly isn't something to sniff at. But to build a nest egg for retirement, you typically need to take on more risk in exchange for higher returns by investing in the stock market. For example, investing in a top S&P 500 index fund produces average returns of about 10% per year.

Also note that CD rates are unusually high right now because the Fed is keeping the federal funds rate high for now. But these high rates are unlikely to last forever.

Typically, you get the highest interest rates on long-term CDs, such as those with a 5-year term. But currently, you'll find the best rates for 1-year CDs. Why would that be? Banks won't agree to pay elevated APYs for several years if they believe interest rates will drop before then. So they're paying top dollar for shorter-term CDs, while offering lower rates for CDs with further out maturity dates.

The bottom line: If you have decades until retirement, you need returns above 5%. But even if you're comfortable with a lower return, don't expect to earn 5% on CDs in the long run.

When does a CD make sense?

A CD is a good choice for your money when you don't have high-interest debt, you have an emergency fund, and you're already investing for retirement in a tax-advantaged account like a 401(k) or individual retirement account (IRA). It can be an especially good choice for medium-term goals, like if you've set aside money for a down payment but don't plan to buy a house for over a year.

Before you commit your money to a CD, though, make sure you understand what the early withdrawal penalty is and are comfortable letting your bank hold onto your money for the entire term.