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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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Beware of Certificate of Deposit Gotchas

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A reader emailed me this Chicago Tribune article, Don't get burned by withdrawing CD early (hat tip to the reader). It describes what happened to a couple who closed their Bank of America CD early for a down payment for a house. They were shocked to learn of Bank of America's new early withdrawal penalty. I described Bank of America's new CD early withdrawal penalty in May. For CD terms over 12 months, the new penalty is 3% of the principal plus $25. The couple's CD term was 13 months, and it had an interest rate of only 0.20%. So the penalty came out to almost 14 times the total interest the CD would have earned if they held the CD to maturity.

With the new harsh penalty, the depositor gets hit twice. First, they get hit by the very low interest rate. Second, they get hit hard if they need the money before maturity. When I first posted on this penalty change, I heard a bank representative make the claim that the new penalty was intended to cover the administrative cost for an early CD closure. That may justify the flat $25 fee that's added to the penalty, but it doesn't justify the penalty of 3% principal.

The author of the article who answered the couple's question also mentioned a few other CD gotchas. One important gotcha is that the early withdrawal penalties at most banks have the potential to eat into the principal. In other words, you will come out with less money than what you put in.

The potential of losing principal is common even with early withdrawal penalties based a number of months of interest. For example, if the early withdrawal penalty is 6 months of interest, and you close a CD early after 2 months, you may not only lose all 2 months of accrued interest, but you may also lose some of the principal equal to 4 months of interest.

List of CD Gotchas

I discussed this issue and more CD gotchas in my March blog post, Important Details of CD Early Withdrawal Penalties. It's important to review the CD disclosure not only before you open a new CD, but also before you let a CD renew. We all know that when your CD matures and is renewed, the interest rate will likely change. It's also important to know that a new early withdrawal penalty may take effect on the renewed CD.

As we learned last week, you can't just open a CD and forget about it. You have to keep on top of all communications from the bank or credit union. They could make changes to the CD before maturity. Last week I described how Fort Knox Federal Credit Union increased its early withdrawal penalty on existing CDs and how the NCUA approved of this change.

  Tags: CD rates

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Comments
17 comments.
Comment #1 by MDBill posted on
MDBill
Good grief.  Why in the world would anyone tie up their money for 13 months for .20% interest?  I'm no supporter of BoA, and I don't mean to be unsympathetic, but depositors have to take some responsibility for their own financial well-being.

28
Comment #2 by Anonymous posted on
Anonymous
I agree with #1.  Seems like a lack of common sense there.

6
Comment #3 by bbug (anonymous) posted on
bbug
If the CD was in an IRA, the depositor gets hit a third time with tax on the withdrawal of money used to pay the penalty.

I wouldn't just blindly accept the penalty. I would write the CEO of B of A and threaten an internet campaign against BOA and letters to regulatory authorities. But I wouldn't threaten to not do business with B of A again. That would be a given.

1
Comment #4 by Anonymous posted on
Anonymous
When will people on this website finally get it in their heads that being a "saver" in American dollars is a very foolish thing.  They are ****ed in many ways, not just a 3% penalty.  The true inflation rate now is over 7%, when government gimmicks to artificially lower the reported rate are removed.  That is with consideration of lower oil prices.  So, you are losing from the getgo.

The best thing to do is NEVER open an American dollar based CD.  Keep all American dollars in liquid accounts.  Take a percentage of your savings, RIGHT NOW, and go to your local coin shop and buy gold, silver and platinum coins.  Put them away and forget about them.  They will be worth ten-twenty times their current value in 10 years time.  That is your core savings.

Keep the remainder in a liquid MM or online savings with the highest percentage yield, and wait for the dollar to complete it technical rise while the EU falls apart.  Then, take that money, and move it into German marks, if they become available again, or Canadian dollars, or Australian dollars, if they do not.  Keep only enough US cash to pay bills.  The dollar is going to crash and burn, once the banksters have finished with their deflation-mode, and are finished buying up assets at fire sale prices, because there is no doubt there will be more quantitative easing (money printing), and, eventually, hyperinflation.

4
Comment #5 by bbug (anonymous) posted on
bbug
#4,

I wish I was as certain as you that gold, silver and platinum will increase in value ten to twenty fold and that the foreign currency values will fluctuate as you believe. Then again, perhaps I don't wish that. I see your certainty as a recipe for disaster. And inappropriate for those of us who aren't risk takers.

16
Comment #6 by Inforay posted on
Inforay
#4, the reason most of us read this blog religiously is because it is the best website that there is iin letting us know where to safely grow our money.  Most of us are not into other investments or speculation or taking risk.   Up until now the strategy of investing in the longest term CD with the highest interest rate and then continuing to do so when each CD matured was a very safe and reliable way of making your money grow.  You looked at various factors, including the early withdrawal penalty, which for credit unions used to be 90 days of interest, and then if the interest rates rose you calculated whether it was worth breaking the CD and take the early withdrawal penalty.  Now the interest rates have hit an all-time low and it seems that penalties can be changed -- just two years ago, this had never happened.  Plus, if you wanted the money, you were generally allowed to access the interest accrued in your CD without any penalty.  I had done so in the past with Discover Bank, Capital One, Key Bank, etc.  In the last two years, things have changed dramatically.  This doesn't mean I will give up on CDs and get into riskier investments.  With every foreign currency investment there is always a risk depending on whether the dollar goes up or down.  Those of us who read this blog are conservative with our hard-earned money and like safety. I commend Ken for his exceptional service to those like me.

19
Comment #7 by shinoby posted on
shinoby
B of A is a H of C . . . a House of Cards.  They are bankrupt.

2
Comment #8 by emdtech posted on
emdtech
B of A has earned a position on our "do not use list" for many reasons: First of all, they act like "Banksters" by extracting every dime out of anyone that does business with them. Secondly, they are not an ethical bank based on our personal experience.



You would be further ahead to use a local credit union that cares about their customers verses any big bank. Also, the savings and CD rates are usually much better. Always  - read what is disclosed to you from any institution prior to signing. If you do not understand the penalties for exiting a CD prior to maturity, ask the bank to explain in detail and in terms you understand. Do not be embarrassed for not knowing banking details. It is your money and you need to know how to properly invest it.

3
Comment #9 by Rob (anonymous) posted on
Rob
Ally and other banks will send you a copy of the deposit agreement to review in advance.  If a bank sends you notce of negative changes use the 30 day window to get out.  There is still a large group of cd holders that will not and this is what banks are counting on.  I'm not sure with todays 2 2=7 legal mentality how this would play out, but look at what happened to the GM bond holders.  Be aware that there are CDs that state "we may deny you withdrawal of funds and if we do allow you,we will charge you a penalty."  I don't know if this would apply to IRA cds. 

3
Comment #10 by pearlbrown posted on
pearlbrown
Call me devil's advocate.... but big banks are sometimes - but not always - the "bad guys".  By the same token, credit unions are sometimes - but not always - the "good guys".   It all depends on the circumstances.

For example, I have no big complaints about BOA (some very minor irritations, yes) and have been doing business with them for well over 20 years.  While they are not perfect, I will continue to do so until it is no longer in my best financial interest.  Of course, that might change if I were to see unethical behavior from them, as unfortunately it sounds like emdtech (#8)  experienced.  I also maintain small accounts with Chase, and with CapitalOne (although admittedly very reluctantly with this one and probably not for much longer) because it serves my interests.

As for credit unions, I have had fantastic customer service from many, and everything else being equal, I prefer to do business with a credit union.  On the other hand, it was a credit union - Fort Knox Federal Credit Union to be exact - which demonstrated how much it cares for its members by raising the EWP on existing CDs. 

If you start by defining what is important to you, the answer to bank-or-credit-union becomes apparent quickly - it's whichever one best meets your needs. 

 

9
Comment #12 by Anonymous posted on
Anonymous
Two biggest mistakes were.....a) Doing business with Bank of America and b) getting a CD for .2%. If it makes anyone feel better....I really doubt B of A is going to be in business much longer. I feel badly for the employees....but not for the bank itself. They are a failure.

1
Comment #13 by Anonymous posted on
Anonymous
RE:  The IRA early withdrawal comment:   Many banks will allow early withdrawal at no penalty if the depositor is 59 1/2 years or older.  Since many banks offer this withdrawal feature it is again imperative to check the withdrawal disclosures prior to depositing the IRA $.  Though it is normally only on IRA $, every little bit helps.

1
Comment #14 by Anonymous posted on
Anonymous
Have to whole heartedly agree. Although compassionate for the couple it appears they definately need some professional assistance in their financial matters. There is absolutely no justification of opening a 13 mo. CD at .20%.

WHY?

Please anyone seeking rates for any type of financial product utilize websites like bankrate or ratebrain. They will provide you with the interest rates for various products on a national level. For example today, Sallie Mae offers a 1.10% MMA with no minimums, no fees. Had they investigated their options they would not have been in this predicament. Only positive is a discussion with a tax consultant for any tax advantages from this unfortunate and unnecesary situation.

2
Comment #15 by pearlbrown posted on
pearlbrown
I agree that people seeking rates for any type of financial product should be using websites like DA or the others #14 mentioned to inform themselves.  It is a shame that the couple in the article settled for such a meager rate on what was surely hard-earned money.

Surprisingly, for some people - regardless of their age - the "nearby brick and mortar" factor drives their choice of financial institution and leads them to refuse to consider other alternatives which might be more lucrative.  I have several friends (50 and above) who are comfortable using the Internet, using Facebook, etc, but will never do business with a bank they cannot see.  Assurances of the health of the financial institution, and reminders that funds on deposit are insured by the FDIC, etc. do not change their perspective.   

As the saying goes, you can lead a horse to water but you can't make him drink.   

4
Comment #17 by Hay shinola (anonymous) posted on
Hay shinola
better one  B OF A  BAG OF CRAP

1
Comment #18 by Anonymous posted on
Anonymous
bof a =s perk street

1