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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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10 Gotchas to Avoid for Bank CD Investors


With interest rates so low these days, you may not want to lock up your money in a certificate of deposit. However, if interest rates continue to fall or stay low, CDs can be a better investment than savings accounts for some of your money. Most CDs are pretty straightforward, but there are some important details that are often overlooked. That could be costly. I've put together a list of 10 CD tips and potential gotchas. If you're a regular reader of this blog, you probably have seen me mention some of these in several past blog posts. I decided it would be a good idea to consolidate them into one list for those new to CDs.

  1. Most banks and credit unions set up CDs so that they automatically renew when they mature. The new CD will typically have the same term as the matured CD. However, the interest rate may be much lower especially if the original CD was a special. Always check the interest rate of a renewed CD to ensure it's still competitive.
  2. When a CD matures and renews into a new CD, there is typically a grace period between 5 and 15 days when you can close the CD without an early withdrawal penalty. If you close the CD after this window of time, you will be hit with an early withdrawal penalty. The bank will usually send a notice a few weeks before the CD matures. It's best to mark the maturity date on your calendar when you first open the CD.
  3. If you close a CD during the grace period rather than renew it, you may not receive interest during the grace period. If you're going to close a CD, it's best to close it on the day of maturity or soon after to avoid loss of interest.
  4. When the CD matures and renews into a new CD, be aware of other potential changes in addition to the interest rate. A new CD disclosure may take effect. For example, if you have a 5-year CD at Pentagon Federal Credit Union that is going to renew in November 2011, the early withdrawal penalty for the renewed CD will be double of what it used to be (new 5-year CDs now have a penalty of up to 12 months of interest).
  5. Many banks don't take instructions to close a CD before maturity. You have to wait until it matures. Even if the bank will accept instructions, be very careful in specifying the closure date. There was a case in which Discover Bank closed a reader's CD early when she intended for the CD to be closed at maturity (see post).
  6. If you have to close a CD before maturity, the early withdrawal penalty may eat into the principal. One example is a CD with an early withdrawal penalty of 6 months of interest. If you close the CD 2 months after you opened the CD, you'll not only lose all 2 months of accrued interest, but also you'll lose some of your principal equal to 4 months of interest.
  7. Early withdrawal penalties for CDs are often more severe than 6 months of interest. Due to the low interest rate environment, banks have been making big changes to the early withdrawal penalties. One recent example is Bank of America's new early withdrawal penalties. One couple was charged a penalty equal to 14 times the total interest the CD would have earned if they held the CD to maturity (see post)
  8. There is some risk that the bank or credit union could increase the early withdrawal penalty before the CD matures. This recently happened with one credit union (see post). Another risk is that the bank or credit union may refuse an early withdrawal request. I have more details about this risk in my details of CD early withdrawal penalties.
  9. CD rates don't always lock at the time of the application but when the bank receives your funds. You have to be especially careful if you have to mail in the application and check. The more friendly banks will lock the rate at the postmark date of your mailed check. Some will give you a certain amount of time to send in the check after your submit the application online. One example is Ally Bank which has a Ten Day Best Rate Guarantee. If you fund within 10 days of opening your account, including the day you open, you will receive the highest rate Ally offered during that period.
  10. When you include one or more beneficiaries, banks often don't specify Payable on Death (POD) or In Trust For (ITF) correctly for purposes of additional FDIC coverage (see post). And sometimes they don't specify the beneficiary at all. Make sure to review how the bank specifies the beneficiaries.

Do you have other tips and potential gotchas for CD investors? If you do, please leave a comment.


  Tags: CD rates

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Comments
12 Comments.
Comment #1 by Anonymous posted on
Anonymous
Nice article, Ken.  You always cover the details so well.  Thanks for all you do!

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Comment #2 by Anonymous posted on
Anonymous
Well done, Ken. You're awesome. One thing I would add is that many banks' terms and conditions say that they don't even have to allow you do an early withdrawl or closure. They can keep your money if they want. This to me is even more scary than the early withdrawl fee......at least the fee is usually well documented.  Sure.....most banks would allow the early closure......but still they would not "have" to......and that is very risky at least to me.

4
Comment #3 by Paoli2 posted on
Paoli2
Another thing you might want to do is be sure to read the Disclosure for certain clauses "before" you sign. Just asking the bank director who is helping you doesn't always give you the correct answers.  I just had one new bank I purchased a CD from rewrite my CD Disclosure and send me a copy because they were unaware they had a clause in it which made the CD "callable" at their discretion.  I don't buy "callable" CDs!  Sometimes the bank directors don't thoroughly read their own disclosures so make sure we do!

5
Comment #4 by me1004 posted on
me1004
Anothoer one you missed: some institutions will require advance notice to close a CD, and sometimes they require that notice in writing. Sometimes that can be a number of weeks in advance of the maturity date. And if you don't give the notice early enough, they will not close the CD on the maturity date. And they might very well keep it there with no interest!

I had this problem with Christian Financial Credit Union -- quite a misnomer as they really should be called Cheating ****s From Hell Credit Union. They required a 14-day advance notice (actually, it was a while ago, and now I can't remember if it was 14 days or 7 days, but the point and effect of this story is the same, so I will use the 14 to explain, as I think that was it). Being a diligent person, I had checked in a month in advance and learned of that advance notice requirement. And mind you, in their disclosures, it said "14 days" not "14 business days." And the notice had to be in writing, but it was OK to fax that.

Well, I gave the notice even a few days earlier than that, giving me a cushion. I faxed it in and confirmed the fax was received. 

But then they refused to honor the notice, saying it was not presented early enough. You see, only then did they switch from saying 14 days to saying 14 business days. And because there was also a 3-day holiday weekend involved in the advance time, in theory I missed the deadline by about 10 hours -- that's all, less than a day! 

They not only would not accept notice to close it on the maturity date, they would not even allow me to then give notice to close it the day after maturity, or the day after that, or... They said now I could not give any notice until after it matures, and then I would still have to give a 14-day notice! And of course, if I close during the grace period, I would get no interest for that time! So, they held it for all that time with no interst to me.

They also did not give it to me on the day I was finally able  to notice that it be closed. They said yes, they closed it, but it would be a few more days before they would give me the money -- processing time! The held my money for more than two weeks after the maturity day and gave no interest.

Yes, of course I yelled and screamed for several weeks at them, and went up the ladder to the higher ups -- they would not budge, were the worst I've ever dealt with. 

So, watch out for advance notice requirements, and that notice must be in writing. Also, be careful about whether time frames are calendar days or business days.

And regardless, NO ONE should do any kind of business with Christian Financial Credit Union.

Moderator Note: Christian Financial Credit Union contacted DepositAccounts.com and according to Christian Financial, the current process does not require an advanced notice to close the certificate. Members have 7 business days to close after maturity date. CFCU also does not have “processing time” involved with closing certificates. Once a certificate is closed, it is simply closed.

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Comment #5 by hwhiteco (anonymous) posted on
hwhiteco
As always, excellent article Ken, thanks and keep up the good work!  Another pointer in order to keep your "float" of non-interest days to a minimum would be, is to inquire as to what all your options are in receiving your funds at should you decide not to renew it at maturity (which is normally the case), including where you'd like to receive it and how fast, etc.  IE, are ACH's, wire transfers, FedEx, snail mail, etc, all available and if so, what fees there are, if any.  In the good old days (not so long ago), when APY's were substantially higher, it would often be advantageous to pay a fee to have it wired into a new, higher paying account, especially if your account was at, or near the level of a Jumbo account. 

Also, I'm not sure if advance notice of the maturity date by the institution is required by law or not but I don't trust being informed by anyone anyway.  With that in mind, after opening a new CD, I also plug a reminder into my PC.  In it, I include all the pertinent information, including transfer methods, so I receive it in an email, far enough in advance notice of the CD maturity date, allowing me to shop new CD's as well as to follow any necessary procedures in executing my options. 

Also, keep in mind, if there's a "Promo Rate" available anywhere that's expiring anytime before a maturing CD date you may have coming-up, it may be worthwhile to do some calculations and make a short-term loan to yourself with funds from another source in order to capture that rate.  Naturally, only if you have the funds available and it makes sense mathematically...sort of a robbing from Peter to pay Paul routine. 


Bottom line with CD's, as well as is the case with any other contracts, is...Obtain a copy of the Disclosure Statement and read it as thoroughly as possible before signing on the bottom line.  You may not catch everything, but it'll often be enlightening and probably do more good than harm everytime!

3
Comment #6 by Anonymous posted on
Anonymous
Hi...I think this is terribly outrageous of these institutions!  One thing is to charge a penalty for an early withdrawal from a CD (which is, after all, a contract) though many are abusing the privilege, but all those other impositions are simply abusive and there ought to be a law against these.  

“If you close a CD during the grace period rather than renew it, you may not receive interest during the grace period.”  

I thought they all withheld interest during grace periods?     Rosedala

1
Comment #7 by pearlbrown posted on
pearlbrown
@me1004 so sorry to hear about your experience.  I'd like to suggest that you also post this experience as a review of the credit union so that others who might be considering doing business with them are informed. 

Also, thank you for supporting "Truth in Advertising" with a memorably funny "also known as" name for that credit union.  :D

4
Comment #8 by Bozo posted on
Bozo
One "gotcha" is the disappearing teaser. For example, earlier this year, Dime Savings offered a 2.5% 15 month IRA CD, which was touted as open until April 15. I guess I was one of the "lucky folks" who bought before it closed, well before April 15, might I add.

Thus, it never hurts to ask "Is the rate locked on application?"

1
Comment #9 by Paoli2 posted on
Paoli2
Ken and Posters:  After reading about what happened to some people who entrusted certain banks with funds and thought they were protected by the amount posted on their receipt, I did some research on the Comptroller of the Currancy's webpage.  There was a question posted about if a person had a bank receipt for a certain amount and the bank posted it incorrectly on the receipt.  The answer was:

"If the deposited item was a check, you will need to contact the party that provided the check to you and obtain a copy of the front and back of the check. If the deposited item was cash, and the bank does not agree to honor the receipt, you will need to consult with legal counsel about your rights."

This basically informs me that our receipts are useless to us unless the bank agrees with us otherwise we need to go through the hassle and expense of getting a lawyer!  Something really needs to be done to make banks more responsible for what their tellers and other employees put or don't put correctly on our accounts.  How can "we" know they have posted something incorrectly if the receipt they give us shows the amount we know we gave them to deposit? 

I think I will contact some officials and find out what if any thing can be done about this really serious problem.  I will not wait until it happens to me.  I am grateful to Ken and others who have opened our eyes to what is going on in the banking industry.

 

1
Comment #10 by Paoli2 posted on
Paoli2
People:  Just an addition.  I called my main "large" local bank and presented the situation to the manager and asked if their receipt would be honored in case of an error.  She brought up something that gave me a bit of peace about this problem.  She said the amount posted on our receipt is exactly the same amount which goes into their computer so if the teller made a mistake, we should see the incorrect amount when she gives us the receipt.  The important thing here is for us to always "check" our receipt before we leave the counter so the error can be taken care of immediately and they can even do a drawer count for the difference in the amounts if any.  So that gives me a bit of peace since I always double check every receipt before I leave the counter.  We can save ourselves a lot of hassle if we do.

1
Comment #11 by Anonymous posted on
Anonymous
I am sorry to have to say this, but, having been a big CD investor in the past, anyone who invests in a CD with a term longer than a few months is playing with fire.  Inflation is going to soar into the triple digits.  That the primary dealers of the Federal Reserve are already preparing for this is evidenced that they are using all the funds they get by selling long term treasuries and mortgage secured bonds to the Fed to buy stocks.

Better gold/silver than stocks.  Or, perhaps, because gold/silver have appreciated so much over the last few years, and everyone is thinking the same about them, better to buy platinum, which will do even better than gold once the hyperinflation begins.  At any rate, anyone in a long term CD is going to be wiped out.

1
Comment #12 by Paoli2 posted on
Paoli2
#11 From all the past years I have been in CDs, it was when inflation soared that they paid 12% and higher!  So how do you get it that we will be "wiped out" at this time?  Even if rates stayed low, we would still have our principal.  I know it would not be worth as much if you take in inflation and all the rest of the hoopala  but it's not the same as being "wiped out", imo.

2