Callable CDs: What Are They And How Do They Work?

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Emily Batdorf

Emily BatdorfBanking Reviewer and Writer

Banking Reviewer and Writer

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Callable CDs: What Are They And How Do They Work?

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Certificates of deposit (CDs) are low-risk investments that generally offer fixed-interest earnings over a set period of time. Callable CDs, which can be terminated by the issuer before the CD reaches maturity, tend to offer higher interest rates—but they also come with more risk.

Depending on your goals and risk tolerance, callable CDs may fit into your investment strategy. But make sure you understand how they work before opening a callable CD.

What Are Callable CDs?

Callable CDs are similar to other types of CDs. They are deposit accounts that earn fixed interest over a matter of months or years. After opening a traditional CD, you generally can’t touch your deposit or earnings until your maturity date without facing penalties. The same is true of callable CDs.

Callable CDs, however, have one major caveat: The issuer can call, or terminate, your CD before maturity, causing you to miss out on future interest earnings. However, you will not lose money. When a CD is called, you receive the interest your account has earned so far and everything you deposited.

You can invest in a callable CD at a bank or credit union. FDIC insurance and NCUA insurance protect callable CD deposits up to maximum coverage limits at insured institutions.

How Do Callable CDs Work?

Callable CDs work like non-callable CDs in many ways. Before you open a CD, you select a term or length of time until your CD matures. Typical CD terms may range from six months to ten years. Callable CDs, on the other hand, are generally longer-term and may be up to 20 years.

When you open any CD, you typically make a single initial deposit. This deposit, known as your principal, earns interest at a fixed rate until your CD matures at the end of the term. When the term is up, you can withdraw or reinvest your principal and interest earnings. However, if you withdraw money before your CD matures, you’ll pay early withdrawal fees that can erode your earnings.

For callable CDs, the biggest difference is that the issuer can redeem your CD before it matures. An issuer can only terminate a CD during the call period on a specified callable date or call date. These dates should be outlined in a CD’s disclosures and tend to happen every six months.

If your issuer calls your CD, you’ll receive your entire principal deposit plus the interest you earned up to that point. But you’ll miss out on the interest you planned to earn if you held the CD to maturity.

For example, say you deposited $10,000 into a callable 5-year CD with an interest rate of 5.00%. After five years, you should have earned $2,762.82 in interest. But say your issuer called your CD after just four years—in that case, you’d only earn $2,155.06 in interest.

Whether or not your CD gets called is entirely up to the issuer. As the investor, you do not have a call option. Callable CDs aren’t always called—the uncertainty is what makes them riskier than non-callable CDs. Typically, issuers call CDs when deposit interest rates drop and they can save money by offering CDs with lower rates.

Pros and Cons of Callable CDs

Pros

Often have higher interest rates than regular CDs
FDIC or NCUA insurance coverage
Fixed interest up to the first call date

Cons

Full interest earnings not guaranteed
Only the issuer can call the CD
Early withdrawal penalties usually apply

Callable vs. Non-Callable CDs

Callable and non-callable CDs have a lot in common, but they also have a few major differences. Compare these two types of CDs closely if you’re thinking about opening one vs. the other.

Callable CDs: What Are They And How Do They Work?

Callable CDs	Non-Callable CDs
Fixed interest	Fixed interest
Penalties for early withdrawals	Penalties for early withdrawals
Investors can access funds at maturity	Investors can access funds at maturity
Issuer can call CD before maturity	Guaranteed interest earnings for entire term
Generally higher interest rates	Generally lower interest rates
Mid- or long-term up to 20 years	Short-, mid- or long-term up to 10 years

Deciding between a callable CD and a non-callable CD comes down to your risk tolerance. If you want to prioritize higher interest rates for now—knowing you may have to reinvest your deposits if your CD is called before maturity later on—a callable CD may be the best place to maximize your earnings. But if you prefer guaranteed interest over a set length of time, a non-callable CD is best.

Brokered CDs vs. Callable CDs

Don’t confuse brokered CDs with callable CDs. While many brokered CDs are callable, they aren’t the same thing.

You purchase a brokered CD through a brokerage rather than a bank or credit union. Unlike regular CDs, brokered CDs can be sold on the secondary market if an account holder wants to close their account early. To withdraw money from a callable or non-callable CD before maturity, you will more than likely incur early withdrawal penalty fees.

Bottom Line

Callable CDs may be useful investments if you’re willing to take on additional risk in exchange for higher earning potential. If your CD is called before maturity, you’ll have to find somewhere else to put your money and miss out on the full interest earnings you were hoping for.

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Frequently Asked Questions (FAQs)

Can you lose money on a callable CD?

Callable CDs are FDIC-insured so your principal is not at risk of bank failure. However, like most CDs, you’ll have to pay fees if you withdraw money from your callable CD before it reaches maturity. You may also miss out on potential interest earnings if the issuer calls your CD before the term is up. But if this happens, you’ll receive all of your principal, plus the interest you’ve earned so far.

Are callable CDs worth it?

Whether or not callable CDs are worth it depends on your financial goals. If you don’t mind the possibility of needing to reinvest your money, a callable CD and its higher interest rates may be worth it. But if you prefer the certainty of earning fixed interest for the full length of your CD’s term, a non-callable CD is likely a better option.

Where can you open a callable CD?

You can open a callable CD at a bank, credit union, brokerage or other financial institution. They tend to be less common than non-callable CDs, so you likely won’t come across them as often.

How often are callable CDs called?

Callable CDs can be called on a CD’s call dates, which are typically spaced six months apart. During the noncallable period, an issuer can’t use its call feature. Typically, the first several months of a callable CD’s term are noncallable. Before opening a CD, read the disclosures carefully to learn about the account’s specific policies, especially its call dates.