4 Signs You Should Skip CDs Despite the 4% Rates

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KEY POINTS

  • You have high-interest debt to tackle first.
  • Not having access to your cash is a big downside of CDs.
  • Make sure you have six months' expenses saved in an emergency account.

With annual percentage yields (APYs) on certificates of deposit (CDs) hitting 4.00% or higher, it might seem like the perfect time to lock in your money and earn some guaranteed returns. But while CDs can be a great low-risk savings option, they're not right for everyone. For some people, putting money into a CD could actually work against their financial goals.

Before you commit, here are four signs you might want to skip CDs -- even with today's high rates.

1. You might need the money before the term ends

CDs require you to lock in your money for a set period, which can range from a few months to several years. If you withdraw your money early, you'll likely face penalty fees, which can eat into your interest earnings -- or even your principal.

For example, a 12-month CD with a 4.50% APY might sound great, but if an unexpected expense pops up six months in, you could lose several months' worth of interest when cashing out early.

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If you might need access to your cash, consider opening a high-yield savings account (HYSA) instead. Many online banks offer 4.00% APY or more on savings accounts, giving you flexibility without the commitment.

Have your cash languishing in a low interest account? Open a high-yield savings account today to potentially earn nearly 10 times more on your money.

2. You have high-interest debt

If you're carrying high-interest debt -- like credit card balances or payday loans -- putting money into a CD isn't the best move. While earning a 4% return on a CD might seem appealing, it doesn't make sense if you're paying 20% or more in interest on credit card debt.

For example, if you have $5,000 in credit card debt at 20% interest and put $5,000 into a CD earning 4%, you're still losing 16% in net interest -- and potentially more due to lost compound interest. That's money that could have been used to pay down your debt faster.

Consider using a 0% APR balance transfer credit card to pay off your debt without incurring more interest. Once your high-interest debt is under control, then you can explore safer savings options like CDs.

3. You want higher long-term growth

CDs offer stable returns, but they generally don't keep up with long-term inflation or the growth potential of investing in stocks. While a 4% CD might sound great now, historically, the stock market has averaged 10% annual returns over the long run (as measured by the S&P 500 Index).

If you're saving for a long-term goal -- like retirement, a home down payment, or growing wealth -- then locking your money in a CD could mean missing out on thousands of dollars you could earn from a different investment.

If you have a longer time horizon and can handle some risk, consider opening a brokerage account and investing in a low-cost index fund or a diversified investment portfolio. While there are no guarantees, investing has historically outperformed CDs over the long run.

4. You don't have a solid emergency fund

CDs aren't a great place for emergency savings. Since they require you to keep your money invested, they don't provide the easy access you'd need in case of a job loss, medical emergency, or unexpected expense.

If you already have six months' worth of expenses saved in a high-yield savings account, then a CD could be a safe place for extra cash. But if you're still building your emergency fund, putting money into a CD could leave you short on cash when you need it most.

Is a CD right for you?

While CDs can be a great low-risk option, they're not the right fit for everyone. If you might need quick access to your money, want higher long-term returns, or are still building your emergency fund, you may be better off with a high-yield savings account or an investment strategy.

However, if you have extra cash you won't need for a while and want a safe, guaranteed return, a CD could still be a smart choice. Just make sure it aligns with your financial goals before locking up your money.

Our Research Expert