# One Good CD Rate at Capital One, But Beware of the Early Withdrawal Penalty

Capital One used to offer several competitive CD rates. All of its CD rates are now below average except for one term. It's the 10-year term, and it has yield of 2.50% APY (2.55% for Costco members) as of 1/9/2012. That currently ties Discover Bank which also offers a 2.50% APY 10-year CD (2.55% for AAA members). This is the highest rate you can get from a bank CD that's nationally available. Higher rates are still available at a few all-access credit unions (see my last CD rate survey).

If you're a Costco member and not an AAA member, the slightly higher interest rate is one reason to choose to go with Capital One. Also, if you're new to Capital One Direct Banking, you can qualify for a one-time bonus ($60 for Executive members and $20 for Gold Star and Business members). Refer to Capital One's Costco page for the full details.

There is one important downside with Capital One as compared with Discover. Capital One's early withdrawal penalty (EWP) is much more severe. The full details of Capital One's EWP can be found in their disclosure:

3. On a CD with a term of more than one year:

* If a withdrawal is made within six months of maturity, the penalty will equal six months' interest on the principal amount withdrawn

* If a withdrawal is made six months or more before maturity, the penalty will equal the greater of six months' interest or the Economic Replacement Value on the principal amount withdrawn.

Here's how they define the Economic Replacement Value (ERV):

The Economic Replacement Value is an estimate of the interest cost to us if we were to replace a CD that is withdrawn early with another CD having a term that is comparable to the remaining term of the original CD. If interest rates have risen, then the cost of the new CD will be higher.

So for the long-term CDs, the minimum amount of penalty is 6 months of interest. However, it can be much worse if interest rates rise. Here's one example that they provide of this Economic Replacement Value (ERV):

1. Perhaps you have a 5-year CD and you withdraw $40,000 of principal 27 months early.

2. But rates have risen so that a new CD has an APY 0.50% higher than your original CD.

3. Therefore, the ERV would be $450.

Here's an example using the current 10-year CD with a 2.55% APY and a $10K deposit. Let's assume that this CD yield rises to 5.55% 5 years from now. Based on my calculation, the EWP would come out to $1,500. That's more than the total interest earned for the first five years ($1,342).

It should also be noted that Capital One gives itself the right to refuse an early withdrawal request. According to the disclosure:

You may not withdraw principal from your account before the account's maturity date. If we allow early withdrawal, including account closure, you will be assessed a penalty for early withdrawal

## Comparison to Discover Bank's Early Withdrawal Penalty

Discover Bank's early withdrawal penalty on its 10-year CD is currently 9 months of interest. For a $10K deposit and a 2.55% APY, that's only $191. Refer to my post Comparing CDs from Ally and Discover Bank for more Discover Bank CD details. Also, my post Comparing the Best CD Rates After Early Withdrawal Penalties shows how the Discover Bank 2.50% 10-year CD compares with PenFed's 2.75% 7-year CD.

## Other Capital One Direct Banking Products

Like many other internet banks, Capital One has been cutting the rates on its savings and money market accounts. Its highest paying liquid account for Costco members is the InterestPlus Online Savings account which has a 0.85% APY (as of 1/9/2012). For this Costco version, customers can get quarterly 10% bonuses based on their interest earned with an average balance over $10,000. I have more details in my review of Capital One/Costco account review. Costco members can also get the new-account bonus from this savings account.

## Capital One Direct Overview

Capital One has two banks with separate FDIC charters: Capital One Bank (USA), N.A. and Capital One, N.A. According to Capital One Direct's FAQ page, deposits are insured by the FDIC under Capital One Bank (USA), N.A. The bank has an overall health score at DepositAccounts.com of 5 stars (out of 5) with a Texas Ratio of 9.51% (above average) based on September 2011 data. Please refer to our financial overview of Capital One Bank (USA), N.A. for more details. The bank has been a FDIC member since 1994 (FDIC Certificate # 33954).

(anonymous)posted on(anonymous)posted onBut on their CDs, I remember they were getting "cute" right around the time I was leaving (albeit for a different reason, as already explained). Their penalties became somewhat "non-standard". I just made a mental note of it . . that's all . . put up sort of a permanent red flag in my head. If you decide to go in . . . be really careful and investigate terms and conditions very, very thoroughly.

(anonymous)posted on