How Does a CD Account Work?

Opening An Account

In order to deposit money into a certificate of deposit (CD), a customer must have an account with a financial institution. To open an account, a customer needs to provide personal information, some of which is required by law. This information includes at least a full name, address and taxpayer ID.

Funding the CD Account

Once an account is opened, a deposit is made to fund the account. By funding the account, the account owner agrees to the terms of the CD, which includes a time frame and an interest rate, as well as rules and procedures affecting the account. The most important of these is what will happen if the funds in the CD are withdrawn before the maturity date. Usually, there is a forfeiture of interest and may even be a penalty of principal.

Earn Interest

Interest is accrued within the CD account according to the terms of the CD. Institutions credit interest to the account at different intervals: some monthly, some quarterly and some less frequently. When interest is credited by the bank, the balance of the account is increased.

CD Matures

When the full period of time specified in the CD term has elapsed, the account is said to have "matured." When a CD matures, the customer has two options. One option is to re-deposit the money into another CD with the same terms at the current interest rate. This is called "rolling over the CD." Many banks will do this automatically a certain number of days after maturity unless instructed differently by the account owner. The other option is for the customer to withdraw the funds, closing the CD account. Either way, the account owner receives back both the initial deposit and the credited interest for the account.