What is a callable CD? Here’s what to know

If you’re looking for a safe way to earn interest on your savings, a callable CD could be an option worth considering.

Unlike traditional certificates of deposit, callable CDs give banks or brokerages the right to end your CD early, before it reaches maturity. In exchange for this flexibility, they typically pay higher interest rates than standard CDs.

What is a callable CD?

A callable CD is a certificate of deposit that allows the financial institution holding your deposit to “call” or redeem your CD before its maturity date. This feature gives the issuer flexibility to adjust to changing market conditions, particularly when interest rates fall.

When a bank calls your CD, you’ll receive your full principal back plus any interest earned up to that point. However, you’ll miss out on the interest you would have earned if the CD had reached its full maturity date.

The callable feature benefits only the issuer, not the depositor. As with traditional CDs, you’ll typically face early withdrawal penalties if you need to access your funds before the CD matures.

Expert tip: When do callable CDs make sense?

“The premium rate you receive on a callable CD — often 0.25%-0.50% higher than regular CDs — is essentially compensation for taking on the risk that your CD might be called early. Callable CDs are best when you expect interest rates to remain steady or rise, as banks are less likely to call CDs in those environments.”

— Hanna Horvath, CFP, Managing Editor of Banking

Most callable CDs on the market today offer APYs of 4% and higher, more than double the national average for regular CD rates.

The callable feature can only be enacted by the issuer. In other words, if you invest money in a callable CD, you are unable to access the funds early without incurring an early withdrawal penalty.

Read more: Compare today’s best CD rates from Bankrate.

How do callable CDs work?

Callable CDs function similarly to traditional CDs in that you deposit money for a set period and earn a fixed interest rate. The key difference is the call feature, which gives the issuer the right to terminate your CD early.

When you open a callable CD, you’ll want to pay attention to three important dates:

• Opening date: When you make your initial deposit
• Call date: The earliest date the issuer can redeem your CD (usually after a protection period)
• Maturity date: When your CD term ends if it isn’t called early

Banks typically call CDs when interest rates drop significantly. For example, if you have a 5-year callable CD paying 4.5% and market rates drop to 3%, the bank has a financial incentive to call your CD and reissue new ones at lower rates.

Most callable CDs include a “non-call period” or protection period during which the issuer cannot call the CD. This period can range from six months to several years, depending on the CD’s terms.

When shopping for a callable CD, consider these factors:

• Compare rates with traditional CDs and high-yield savings accounts
• Verify the CD comes with FDIC insurance coverage
• Check early withdrawal penalties
• Review whether the rate premium justifies the call risk

Example of a callable CD

Let’s say you deposit $15,000 in a five-year callable CD with a 4.5% APY. If the CD reaches its full maturity, you would earn approximately $3,693 in interest over the five years.

However, if after two years the bank decides to exercise its call option (assuming the non-call period has ended), you’ll receive your $15,000 principal back plus approximately $1,380 in interest earned during those two years. You’ll then need to find a new place to invest your money, possibly at lower prevailing interest rates.

Use Bankrate’s CD calculator to determine how much you could earn with different CD terms and rates.

Callable CD vs. traditional CD

Traditional CDs guarantee your interest rate until maturity. The bank can’t change the terms, and you can’t withdraw funds early without paying a penalty.

Callable CDs offer higher interest rates to compensate for the risk that the issuer might terminate the CD early. While this gives you potentially higher returns, you lose certainty about how long your money will actually be invested.

Both CD types typically charge early withdrawal penalties if you need to access your funds before maturity.

Read more: Learn about different CD types.

Where to find callable CDs

Callable CDs aren’t widely available from major banks or credit unions. None of the 12 largest banks or credit unions in the United States (by asset volume) currently offer callable CDs to retail consumers.

Your best options for finding callable CDs include:

• Brokerage firms: Companies like Vanguard, Schwab, and Fidelity sometimes offer brokered CDs with call features
• Online banks: Some online-only banks offer callable CDs with competitive rates
• Community banks and credit unions: Smaller regional institutions occasionally offer callable CDs to attract deposits

Pros and cons of callable CDs

Pros

• Higher interest rates: Callable CDs typically offer 0.25% to 0.50% higher APYs than traditional CDs of similar terms.
• Fixed interest rates: Your rate is guaranteed until either the call date or maturity.
• Principal protection: Your initial deposit is protected, even if the CD is called early.
• FDIC insurance: Callable CDs from banks are insured for up to $250,000 per depositor, per institution.

Cons

• Call risk: The issuer might redeem your CD when interest rates fall, leaving you to reinvest at lower rates.
• Uncertain terms: You can’t be sure how long your money will actually be invested.
• Early withdrawal penalties: You’ll face penalties if you need to access your funds before maturity.
• Limited availability: Callable CDs are less widely available than traditional CDs.
• Complexity: Understanding call features and non-call periods adds complexity to your decision.

FAQs about callable CDs

What happens to my money if a CD is called?

When a CD is called, the issuer terminates it before the maturity date. You’ll receive your full principal amount plus any interest earned up to the call date. The bank will typically notify you in advance and provide options for reinvesting or transferring the funds.

How often do banks actually call CDs? 

Banks typically call CDs when interest rates fall significantly below the rate they’re paying on your CD. During periods of falling rates, the likelihood of calls increases. Historically, banks exercise their call option when they can save 0.50% or more by replacing your CD with lower-rate offerings.

Are brokered CDs different from bank-issued ones? 

Yes. Brokered CDs are purchased through a brokerage rather than directly from a bank. The main difference is that brokered CDs can be sold on the secondary market before maturity, potentially avoiding early withdrawal penalties. However, selling on the secondary market might result in principal loss if interest rates have risen since you purchased the CD.

Bottom line

Callable CDs offer potentially higher interest rates than traditional CDs, but this comes with the risk that your CD might not reach its full maturity. The issuer’s ability to call the CD early creates uncertainty about how long your money will be invested and how much interest you’ll ultimately earn.

These products are best suited for investors who want higher rates and don’t need guaranteed returns for a specific period. If you value certainty and want to know exactly how much you’ll earn and for how long, a traditional CD may be a better choice.

Before investing in a callable CD, be sure to compare rates with other savings options, understand the call features, and consider how potential interest rate changes might affect your investment.

Explore other CD options, including no-penalty CDs that allow you to withdraw your money early without fees.