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

With a background in education and a fascination with finance, Emily Batdorf writes approachable content for consumers who want to deepen their understanding of personal finance topics. She loves writing about financial foundations—like opening the r.

With a background in education and a fascination with finance, Emily Batdorf writes approachable content for consumers who want to deepen their understanding of personal finance topics. She loves writing about financial foundations—like opening the r.

With a background in education and a fascination with finance, Emily Batdorf writes approachable content for consumers who want to deepen their understanding of personal finance topics. She loves writing about financial foundations—like opening the r.

With a background in education and a fascination with finance, Emily Batdorf writes approachable content for consumers who want to deepen their understanding of personal finance topics. She loves writing about financial foundations—like opening the r.

Ashley Barnett started writing and editing personal finance content in 2008. She has held many titles, including content director, blog manager and editor, in addition to serving as a mentor and consultant to countless professionals in her network. S.

Ashley Barnett started writing and editing personal finance content in 2008. She has held many titles, including content director, blog manager and editor, in addition to serving as a mentor and consultant to countless professionals in her network. S.

Ashley Barnett started writing and editing personal finance content in 2008. She has held many titles, including content director, blog manager and editor, in addition to serving as a mentor and consultant to countless professionals in her network. S.

Ashley Barnett started writing and editing personal finance content in 2008. She has held many titles, including content director, blog manager and editor, in addition to serving as a mentor and consultant to countless professionals in her network. S.

Updated: Sep 26, 2023, 9:19am

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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.