3 Alternatives to CDs - Experian (2024)

Certificates of deposit (CDs) are popular low-risk investments. After funding one, your money will earn interest during the CD's maturity period, which could last anywhere from one month to several years. You'll get your money back, plus interest, when the CD expires. Yields are often higher than traditional savings accounts, but you'll likely be penalized for withdrawing your funds early. The following three alternatives to CDs provide more liquidity and could be a good fit for your financial needs.

1. High-Yield Savings Account

A high-yield savings account works like a traditional savings account, except that annual percentage yields (APYs) tend to be much higher. That could make it an ideal place to keep your emergency fund. Online banks tend to offer the best yields, but it's always smart to shop around and compare rates and fees to make sure a high-yield savings account is worthwhile for your needs.

Pros

  • Competitive interest rates: Some high-yield savings accounts currently have rates as high as 5.40%. The average rate for a traditional savings account is just 0.46%, according to the Federal Deposit Insurance Corp. (FDIC).
  • Easy access to your money: Unlike a CD, it's easy to pull money from a high-yield savings account. You can likely transfer funds online or take cash out of an ATM. That kind of liquidity could come in handy if you face a financial emergency.
  • Low risk: Just like CDs and money market accounts, high-yield savings accounts are FDIC-insured for up to $250,000 per account holder, insured bank and ownership category. Credit unions provide similar coverage. That means the risk of losing money is very low.

Cons

  • Missing out on higher CD rates: At the time of this writing, some CD interest rates are as high as 6.50%. That could allow you to earn $65 for every $1,000 you have in the account.
  • Potential fees: Some banks and credit unions attach fees to high-yield savings accounts. That could include a monthly maintenance fee, overdraft fee, out-of-network ATM fee and more. You might also need to meet minimum account balance requirements.
  • Possible withdrawal restrictions: Some financial institutions limit consumers to six free electronic transfers and withdrawals per month. That could be an issue if you need regular access to your funds.

2. Money Market Account

A money market account earns interest like a savings account but allows you to withdraw funds with greater ease. APYs vary, but they're generally higher than traditional savings accounts.

Pros

  • Accessibility: The downside of a CD is that your money is locked up in the account. You can expect a penalty if you withdraw funds early. Money market accounts offer more flexibility. You can likely pay bills and make purchases online or in person with a linked checkbook or debit card.
  • Higher yields than traditional savings accounts: Some money market accounts have rates up to 5.25%. That can help grow your savings faster.
  • Suitable for different financial goals: A money market account can be a good holding place for your emergency fund or money you're setting aside for a home down payment, upcoming vacation or other financial goal. Either way, you'll be earning interest without trading liquidity.

Cons

  • Potential minimum balance requirements: Some financial institutions may require you to maintain a minimum balance. If this is the case, you'll be charged a fee if your balance drops below that amount.
  • Opening deposit requirements: While some money market accounts don't require a minimum opening deposit, others do. This could be as high as $2,500, depending on the financial institution.
  • Less robust returns than CDs: You can likely find CDs that have higher yields, but again, you'd be giving up liquidity.

3. Bonds

A bond is a type of debt security. By purchasing one, you're lending money to the bond issuer, who is obligated to repay you with interest. Corporations, local municipalities and the federal government all sell bonds.

Pros

  • Low risk: The chances of losing money with a bond are low, especially government bonds. "Junk bonds" carry more risk. These are high-yield corporate bonds that have a greater chance of default.
  • Potential for regular income payments: The majority of bonds dole out fixed interest payments every six months. That can provide a reliable stream of income that you can spend as you wish or reinvest.
  • Possible tax benefits: If you buy government bonds, your earnings may be exempt from federal income taxes. You might also avoid local and state income taxes, depending on where you live.

Cons

  • Modest returns: Vanguard reports that, from 1926 to 2019, average annualized returns for bonds was 5.3%. Meanwhile, stock market returns for a 60/40 portfolio was 8.33%.
  • Some bonds are callable: That means the bond issuer can repay it early, cutting you off from future income. This typically happens when interest rates are declining.
  • Subject to inflation: As inflation rises, the fixed income you receive from bonds will decrease in value. You'll likely feel this more with long-term bonds.

The Bottom Line

CDs have their pros and cons. High APYs can be attractive, but be prepared to sacrifice liquidity. That can be problematic if you end up needing your money before the term ends. High-yield savings accounts, money market accounts and bonds can be good alternatives to CDs. Returns vary, but they're all considered low-risk investments.

Regardless of where you keep your money, tending to your credit health is always a top priority. A strong credit score can help you get the best rates on loans, credit cards and other types of financing. Check your credit score and credit report for free with Experian.

3 Alternatives to CDs - Experian (2024)

FAQs

What is the best alternative to CDs? ›

High-yield savings accounts, money market accounts and bonds can be good alternatives to CDs. Returns vary, but they're all considered low-risk investments. Regardless of where you keep your money, tending to your credit health is always a top priority.

What is a CD Experian? ›

Certificates of deposit, known as CDs, offer higher-than-typical interest rates in exchange for leaving your money in place for a period of time. You can open a CD at a bank, credit union or brokerage, and typically you'll have the option to do so online, by phone or in person.

Do CDs hurt your credit? ›

The short answer is no, opening a CD generally will not hurt your credit. That's because you're not borrowing money; a CD is a type of savings account, which usually doesn't require a credit check.

Are CDs better than stocks right now? ›

Because CDs offer a fixed return, they're the better choice if you'll need the money in the near future. For goals you have within the next five years, go with CDs over stocks.

What is a downside of CDs? ›

Penalties: One of the main drawbacks of CDs is that in most cases you're locked into the maturity term. If you take money from the CD before it matures, you will get hit with a penalty fee equal to at least seven days of the interest earned or even more.

Are CDs no longer popular? ›

Vinyl records beat CDs for first time in decades

Consumers bought more vinyl LPs than CDs for the first time since 1987, according to the RIAA. Consumers bought 41.3 million vinyl LPs and 200,000 vinyl singles in 2022, an increase of 3.2%. CD sales decreased 28% to 33.4 million albums and 100,000 CD singles.

What are the three types of CDs? ›

There are three main types: standard manufactured CDs (CD-DA), CD-R recordable and CD-RW rewriteable.
  • Standard manufactured CDs can be played on any CD digital audio player.
  • CD-Rs can be played on CD-R machines and many but not all CD digital audio players.
  • CD-RWs can only be played on CD-RW compatible machines.

What are the pros and cons of CD? ›

CDs offer higher interest rates than traditional savings accounts, guaranteed returns and a safe place to keep your money. But it can be costly to withdraw funds early, and CDs have less long-term earning potential than certain other investments.

Are there different types of CDs? ›

Traditional certificates of deposit (CDs) offer a fixed interest rate for a fixed term without the ability to withdraw or add to the principal. Specialty CDs include bump-up, add-on, no-penalty, jumbo, and individual retirement account (IRA) CDs.

Are CDs actually worth it? ›

If you're looking for a safe way to earn interest on your savings, a certificate of deposit, or CD, is worth considering. CDs tend to offer higher interest rates than savings accounts. And today's best CD rates are far higher than the national averages.

Are CDs a good idea? ›

CDs are a relatively risk-free way to grow your funds, but they also have some downsides. Mapping out plans to build your savings can be challenging, especially when interest rates fluctuate. A certificate of deposit (CD) is a good alternative if you're risk-averse when it comes to investing.

Are CDs 100% safe? ›

CDs are one of the safest ways to store money and earn a set rate of interest, which can help you better plan your finances. CDs opened at FDIC-insured banks, or credit unions backed by the NCUA, are guaranteed by the federal government.

How much will a $500 CD make in 5 years? ›

This CD will earn $108.33 on $500 over five years, which means your deposit will grow by 21.7%.

Should I put money in a 401k or CD? ›

If you're a long way out from retirement, a CD probably isn't your best savings option. Retirement accounts like 401(k)s and IRAs offer tax advantages and potentially higher returns in the long run.

Are CDs good to buy during a recession? ›

During the Great Recession and its aftermath, the stock market went through turbulent shifts, resulting in great losses for some stockholders. CDs are one option that can help protect your investment from times of turmoil by providing a stable income.

Should I invest in bonds or CDs? ›

After weighing your timeline, tolerance to risk and goals, you'll likely know whether CDs or bonds are right for you. CDs are usually best for investors looking for a safe, shorter-term investment. Bonds are typically longer, higher-risk investments that deliver greater returns and a predictable income.

What is the best way to convert CDs to digital? ›

Digitizing a CD

My go-to for digitizing CDs is a free program called fre:ac, which is available for Windows, Mac, and Linux. After installing fre.ac, just insert a CD into your drive, open the app, and wait for the album info to load. (You can also click the CD icon with a plus sign next to it.)

Do CDs or digital sound better? ›

CDs typically have a higher bitrate (1,411 kilobits per second) than digital formats such as MP3s (320kbps). Lossless formats such as WAV and FLAC offer better sound quality than CDs but are more bulky in terms of file size.

Top Articles
Latest Posts
Article information

Author: Arline Emard IV

Last Updated:

Views: 5703

Rating: 4.1 / 5 (72 voted)

Reviews: 95% of readers found this page helpful

Author information

Name: Arline Emard IV

Birthday: 1996-07-10

Address: 8912 Hintz Shore, West Louie, AZ 69363-0747

Phone: +13454700762376

Job: Administration Technician

Hobby: Paintball, Horseback riding, Cycling, Running, Macrame, Playing musical instruments, Soapmaking

Introduction: My name is Arline Emard IV, I am a cheerful, gorgeous, colorful, joyous, excited, super, inquisitive person who loves writing and wants to share my knowledge and understanding with you.