4 ways to tell if a CD account is right for you

While high interest rates have hurt borrowers, they've helped savers earn more in deposit accounts, including certificate of deposit (CD) and high-yield savings accounts. These accounts have also helped savers offset inflation and earn a higher return.

Inflation cooled the past few months, dropping 0.1% in June on a seasonally adjusted basis, according to the most recent Bureau of Labor Statistics inflation report. Consequently, CD rates have dropped slightly.

Despite the rate drop, many experts contend there are still benefits to opening a CD account in today's rate climate. But since every CD and lender is different, you should understand if a CD is right for you before opening an account. Below, we've listed some factors to consider now.

See how much more you could be earning on your money with a CD here.

4 ways to tell if a CD account is right for you

Not sure if you should open a CD now? Here's how to determine if it's the right move:

It offers a higher annual percentage yield (APY)

It's wise to shop around and compare banks to determine which offers the highest APYs. According to the FDIC, the average APYs on CDs range from 0.23% (1-month CD) to 1.43% (60-month CD). But by shopping around online you can easily find an account with a rate of 5% or higher now, particularly if you use an online bank.  "Online banks and credit unions often offer higher rates due to lower overhead costs compared to traditional banks," says Taylor Kovar, founder and CEO of 11 Financial, a financial advisory firm.

Start shopping for CDs here now.

It has the right term length

Financial advisors often recommend choosing a CD term, or length, that aligns with your goals. That way, your funds will mature when you need them, and you'll maximize your interest earnings. Remember, if you withdraw funds early, you'll incur an early withdrawal penalty, which could offset your earnings.

Kovar notes, "If you have short-term goals or anticipate needing access to your funds sooner, a shorter-term CD might be a better option. If you can lock away your money for a longer period, a longer-term CD could yield better returns."

You might also consider creating a CD ladder strategy. CD laddering occurs when you make deposits into a variety of CDs with different maturity dates. This will allow you to enjoy more frequent access to your funds while locking in various CD rates.

While most CD ladders involve creating multiple CD accounts, Andrew Hall, vice president and wealth advisor at wealth management firm Farther, notes you can combine them in a single account through a brokerage. "Consider a ladder of CDs if you want to match a monthly or quarterly expense. In a CD ladder at a brokerage, a saver can diversify among various banks' CDs in a single account. You can then automate the distributions to transfer to your checking account."

The minimum deposit is affordable

Most CDs require a minimum deposit to open a new account, typically ranging from $500 to $2,500. Before opening an account, make sure the minimum deposit is affordable. If you lack the funds to open a new CD account, consider saving for it or opening a high-yield savings account or other low-risk options.

With a standard CD, you can only deposit money into your account when you open it. If you have the available funds, you might consider depositing more than the minimum deposit amount since you won't be able to contribute funds throughout your term. As a general rule, you can usually maximize your earnings by depositing into a longer-term CD, though this isn't always the case.

The early withdrawal penalty isn't too steep

Despite the best plans, you may need to access the money in your CD account before it matures if an unexpected expense arises. In this case, you'll likely be hit with an early withdrawal penalty, which varies widely depending on your bank and CD term. Penalties usually require you to forfeit a specific period of interest, ranging from 30 to 180 days.

Kovar suggests calculating whether the penalty would negate the interest earned if you need to access your funds before the CD matures and suggests looking into no-penalty CDs as an alternative. 

Learn more about your current CD options online.

The bottom line

CDs are generally a safe bet and a way to guarantee a yield as long as you keep your money in the account until it matures. Opening a CD account could be a good option if you have a lump sum of money you want to keep safe while earning a higher interest rate than a regular savings account. This strategy can help you achieve a short-term financial goal by providing you with a predictable return that ideally matures right when you need the money.