Dedicated to Deposits: Deals, Data, and Discussion

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


Capital One Direct Banking

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a withdrawal is made within six months of maturity, the penalty will equal six months' interest on the principal amount withdrawn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the penalty will equal the greater of six months' interest or the Economic Replacement Value on the principal amount withdrawn.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The Economic Replacement Value is an estimate of the interest cost to us if we were to replace a CD that is withdrawn early with another CD having a term that is comparable to the remaining term of the original CD.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 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).

  Tags: CD rates, Capital One Direct Banking

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Comment #1 by Anonymous posted on
If EWP doesn't matter then consider brokered CDs, eg, today Vanguard is offering 3% 10 year CDs from Goldman Sachs.

Comment #2 by Anonymous posted on
Although most brokered CDs have awful rates, both Vanguard and Fidelity have recently shown some relatively decent longer-term CDs from the two GE banks, as well as GS Bank.  Brokered CDs are obviously much different animals than those established directly with banks, but I'm starting to take notice.

Comment #3 by Brian (anonymous) posted on
It's really hard to analyze CDs based on the EWP.  Even the "mild" ones are costly for the depositors and most folks are very very reluctant to incur it. I'm a CFP and I would tend to discourage a client from breaking a CD and paying the bank that EWP unless it really really made sense.  IMHO, it's far better to analyze CDs on the basis of 1) rate 2)customer svce. (how is the institution to deal with? -- will there be aggravation?) 3) and stability of the institution, really due to risk that they will merge/etc. and the rate could be lost.  Honestly, EWPs do not factor for most people.  That could change if CD rates shoot up, but laddering would help that issue.  Plus, don't see rates rising for awhile.

Comment #4 by Grace (anonymous) posted on
For what it's worth,  I have found both Cap One and Discover to have excellent customer service in my dealings with both of them.  No hassles and no ****ups.   Very courteous to deal with their staff.

Comment #5 by Anonymous posted on
I used to buy CDs from Capital One and Discover and had no problems with them at all.  I just decided lately that I wanted to keep funds closer to home and in places I could get to in a car even if it is a few miles away.  The rates at Cap One and Discover were much higher than other places years ago.  What I see now doesn't tempt me to change my inclinations.  Too bad.

Comment #6 by Kaight posted on
I used to be a Capital One customer . . when they were still in VA (i.e., when you could send money to VA).  When it changed to TX I made another choice.

But 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.

Comment #7 by RJM posted on
i hate captial one with a vengence. If I hadnt been at ING for 11 years, I would close that account because of it.



Comment #8 by Anonymous posted on
RJM, I am with you.  I will never again do business with Capital One.  Once bitten, twice shy as they say.

Comment #9 by Terrence (anonymous) posted on
Never had a problem with Cap One, either at a branch or online. They always seem very efficient and professional.  Also, the CD process with Cap One/Costco was very easy.  To each his or her own.