CD vs High Interest Savings Accounts: Pros and Cons

Certificate of Deposits or High Interest Savings Accounts: Which to Choose from

Investment dollars are tight for most of us and so if you are going to make a move, you want to make sure it is the right one – not only to keep your money safe, but to offer you the highest yield. As most of us like to err on the side of caution, high interest savings accounts are a popular choice. They are very similar to our everyday bank account, but they pay a little extra interest and are a little harder to get to.

However, high interest savings accounts aren’t your only choice if you are looking for a safe cash investment, as a certificate of deposit offers some very similar features, and often with a higher yield.

To get you started in choosing the right investment, you need to know a little more about each option:

Certificate of deposit: An investment with a bank or financial institution with whom you deposit your chosen amount of cash for your chosen set term. Based on your investment amount, term and dividend payment options the bank calculates the interest rate you can earn. The higher the investment and the longer the term, the higher the interest rate, which is fixed for the entire term, however, as a fixed investment there are also high penalties for early access.

High interest savings account: An account with a bank or financial institution in which you can deposit an opening and ongoing balance amount of your choice. The account is accessed primarily online to avoid the temptation to withdraw funds but is linked to your transaction account to easy transfers and withdrawals. The interest you earn is determined by the bank and based on their own account rates which are often adjusted in line with official interest rate movements.

Now you are ready to compare the detailed features and benefits of each investment to determine which is the best for your needs.


When it comes to an investment you want to be ensured of the security of your original investment, and your returns. To secure your chances of getting back your original investment with both a CD and a high interest savings account it comes down to your choice of financial institution. If the financial institution you choose to keep your CD or high interest account with goes under, you will likely lose your funds.

Therefore, look for a financial provider who has a long and secure history, and one who has a good credit rating, AA or higher is best, and you can usually find this information on the provider’s website, or through a quick internet search. Also find out about deposit guarantees which apply to your investment. For example, both Australian and New Zealand Governments implemented a deposit guarantee during the height of the GFC to guarantee funds in Authorised Deposit-taking Institutions up to a certain value, and in Australia the government has announced they will make that guarantee permanent up to the value of $250,000.

So the chances of you losing your initial investment in either a CD or a high interest savings account is very low. The reliability of your return on investment with a certificate of deposit is guaranteed, because the provider will fix the interest rate at the beginning of the term, and guarantee that your invested amount will earn that same interest rate every day of the term, therefore guaranteeing the return you will receive at the end of the term. A high interest savings account on the other hand has a variable interest rate, so while you will likely always earn some interest, you can never be guaranteed how much that will be.

Interest Rates

Both CDs and high yield accounts benefit from what is known as compounding interest, which is where you earn interest on your interest. If interest is calculated daily as it is with high interest savings accounts, you earn interest on your balance, as well as on the interest you earned the day before, and the day before that and so on. If interest compounds monthly as it does with many CDs, you earn interest on your investment, as well as on the interest earned in the previous month, and the month before that; if you had the same balance and the same interest rate, interest compounding daily would earn you more than interest compounding monthly.

When it comes to the interest rate you already know a CD has a fixed rate and a high interest savings account has a variable one, but which is better? A CD interest rate is calculated on the investment amount and the term of the investment, so if you were to compare a three month CD rate with a high interest savings account, the CD would have the lower rate, however, if you were to compare a seven year CD interest rate with an at call high interest savings account, the CD would probably have a higher rate, because a longer fixed investment is of more value to the bank, so they are going to offer a greater incentive to investors.

Plus, remember that even if a high interest savings account rate seems a lot higher, it is impacted by external forces such as official interest rates. However, a CD rate is locked in and stays the same for the entire term – the only down side is if the bank’s official rates go up during your term, your CD interest rate won’t be able to rise.


A high interest savings account is an at call account which means you can access the money in your investment at any time, plus because most accounts are based online this literally means any time of the day or night, any day of the week. Therefore, the only investment terms you need to compare with high interest savings accounts are any promotional periods. For example an account may offer an introductory higher interest rate for the first three months your account is open. They guarantee this rate for this term, and it is possible to follow promotional interest rates across accounts and providers to always have the highest rates.

With a CD you can choose any term you like often from one month to seven years. With terms longer than 12 months you can also choose when you want your interest to be paid – monthly, quarterly, six monthly, annually or at the end of the term. Having your interest paid at the end of your term means a higher interest rate because the bank holds onto your investment for longer, and it also means a higher return because your interest compounds.

While you can choose a longer CD term and qualify for a higher interest rate, remember that there are penalties for accessing your funds before the end of the term. You will of course forfeit any interest you would have earned over the entire term, and you may also have to pay early access fees which could be a portion of your interest or a flat cancellation fee. Therefore, make sure you are investing in a CD with funds you know you won’t need for the entire term.

Alban has been writing about personal finance and online savings account comparison for the last 3 years. He has published numerous articles in leading personal finance blogs.

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