Along with savings accounts and money market accounts, a certificate of deposit (CD) is another option to earn interest just by letting your money sit in the bank. However, there are several key differences that you should be aware of to help you determine whether a CD is right for you.

What is a certificate of deposit, and how do they work?

Unlike a savings account – which encourages open-ended deposit growth – a certificate of deposit allows you to earn interest by agreeing to leave a certain amount of money in the bank for a specified amount of time.

The length of a CD can vary. At Hills Bank, you can open a CD with a term between three months and five years. The minimum deposit is often $500, though some special CDs can be opened with less. In investment terms, the money you put in is known as your principal. The length of the CD is its term, and the time it matures, or ends, is its date of maturity.

The interest rate and annual percentage yield (APY) determine how much you earn on a CD*. Generally, a longer term gets a higher rate. Rates can also vary a lot from year to year. However, if your primary checking account is with Hills Bank, you can earn an exclusive interest rate boost on any of our standard or special CDs.

You can see our CD deposit rates for more details.

What happens at maturity

When a CD matures, you generally have a time limit to decide what to do with the money. If you wait too long, the bank usually rolls over, or reinvests, your money in another CD for the same term at the current rate. Financial institutions typically inform you when a CD will roll over.

If you would like to cash the CD, you can ask the bank to sweep or move the money into your accounts, transfer it to another bank, or send you a check.

Compounding is key

What you actually earn on your CD is the yield – specifically the annual percentage yield (APY). The yield depends on whether the interest is simple or compound, and how often it's compounded. Simple interest is paid only on the principal you initially invested. Compound interest adds in the money that has been earned. At Hills Bank, our CDs earn compound interest.

Should I open a certificate of deposit?

A certificate of deposit is a great option for risk-free saving. When you put your money into an FDIC-insured financial institution, you don’t have to worry about losing it. And if you have some extra cash sitting in your checking account, a CD will almost always provide a greater yield on that money (unless you are meeting the requirements of a high interest checking account). As we mentioned earlier, if your primary checking account is with Hills Bank, you’ll gain even more on your CD with an exclusive interest rate boost.

You can view all of our deposit rates, including a variety of CDs, by clicking here.

But it is important to remember that once you open a CD, that money is essentially locked in. Yes, you may have options to withdraw early if you absolutely need to, but you’ll pay a price that will nullify any potential gains you may have received*. If you often find yourself needing to use more of your savings than you expect to make ends meet, a CD may not be right for you. Our bankers will be happy to help you make the best call for your finances. You can stop by any of our 19 locations, give us a call at 1-800-445-5725 (1-800-HILLSBK), or chat with a banker directly through the Chat Here button at the bottom of this page.

*Penalty may be imposed for early withdrawal. Fees may reduce earnings.