A certificate of deposit, or CD as they are commonly called, is a time deposit. Similar to a savings account, CDs accrue interest over a period of time, with the issuing bank setting the interest rates or CD rates. CDs are most often issued by credit unions and banks, but may also be offered through thrift institutions. Additionally, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and the National Credit Union Administration (NCUA) for credit unions.

With a CD, the consumer agrees to deposit a certain amount of money into an insured account for a specific and fixed term (usually three- or six-months and up to five years). In exchange, the bank or credit union agrees to pay a fixed rate of interest on that money. At the conclusion of the agreed upon time, the consumer is able to withdraw all of the money from the account, in addition to the interest that the invested money has earned.

Although the bank rate, the rate of interest, is usually fixed, some CDs have interest rates that are variable, and yet other CD rates are indexed to the bond market or stock market. Typically, the interest rate, whether fixed, variable, or indexed, is higher than that paid for monies deposited into savings accounts where the money can be withdrawn by the consumer at any time.

The consumer can usually decide, when the certificate of deposit is opened, whether they want the interest earned to be paid out to them or whether they want the interest to be added to the CD, thereby earning compounded interest at the end of the time period.

When the money is deposited into the certificate of deposit, the consumer signs an agreement that they will not withdraw the money prematurely, that is, before the CD has matured or the fixed time period has been reached. If the consumer elects to remove their money before the CD has reached term, there is typically a penalty assessed, frequently involving a loss of interest payments for an agreed-upon period. Therefore, it is not in the best financial interest of the consumer to withdraw their money before maturity, unless they have another investment possibility that will pay a higher rate or they need the money.