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Discover Bank Will Increase CD Early Withdrawal Penalties

POSTED ON BY

Discover Bank

Discover Bank has issued a new deposit account agreement which describes a new early withdrawal penalty for its long-term CDs. It's important to note that it won't affect existing CDs. The new EWP will only be for new CDs opened, and existing CDs renewed, on or after 3/15/13. Here's a summary of how the EWP will be increased:

  • 4- and 5-year CDs: EWP increases from 6mo to 9mo of interest
  • 7- and 10-year CDs: EWP increases from 9mo to 15mo of interest

You can read the full EWP details in section 36 of the Discover deposit account agreement. Below is an excerpt:

Early Withdrawal Fees (for CDs opened or renewed through 3/14/13)
For early withdrawal on Certificates of Deposit:

  • With a term of less than one (1) year, we will deduct three (3) months’ simple interest on the Issue Amount withdrawn.
  • With a term of one (1) year up to and including five (5) years, we will deduct six (6) months’ simple interest on the Issue Amount withdrawn.
  • With a term greater than five (5) years, we will deduct nine (9) months’ simple interest on the Issue Amount withdrawn.

In some cases, the Early Withdrawal Fee may reduce the principal in the CD.

Early Withdrawal Fees (for new CDs opened, and existing CDs renewed, on or after 3/15/13 only)
For early withdrawal on Certificates of Deposit:

  • With a term of less than one (1) year, we will deduct three (3) months’ simple interest on the Issue Amount withdrawn.
  • With a term of one (1) year, but less than four (4) years, we will deduct six (6) months’ simple interest on the Issue Amount withdrawn.
  • With a term of four (4) years, but less than seven (7) years, we will deduct nine (9) months’ simple interest on the Issue Amount withdrawn.
  • With a term of seven (7) years or greater, we will deduct 15 months’ simple interest on the Issue Amount withdrawn.

In some cases, the Early Withdrawal Fee may reduce the principal in the CD.

Thanks to DA member primary for posting on this news in this forum thread.

My Take

Even though I'm disappointed in seeing the larger EWP, I'm glad Discover Bank did the honorable thing by not affecting existing CDs. We all know the two credit unions that raised the EWP on new and existing CDs. Of course, this doesn't guarantee that Discover Bank will remain honorable in the future. There's also the risk that they could refuse an early withdrawal sometime in the future. I don't know the risk of these possibilities, but the current action reduces my worries.

It should also be noted that you still have time to open Discover CDs with the existing early withdrawal penalties.

Impact to Discover CDs

It looks like Discover Bank realized that its long-term CDs were too good of a deal when compared with other banks. Discover Bank's old small early withdrawal penalty allowed the 10-year CD to be a better deal than Discover Bank's shorter-term CDs even when the 10-year CD is closed early. To see this, I've included the table showing the effective yields of Discover Bank's 10-year and 5-year CDs with today's APYs. The effective yields factor in the early withdrawal penalty. For example, if you close an existing 5-year CD after one year, you'll lose 6 months of interest. That's half of the interest, so the effective yield is half of the CD APY.

With the existing early withdrawal penalty, the 10-year CD will have an effective yield of 1.70% if it's closed at year 5. That's higher than the 5-year CD yield (1.65%). Even if the 10-year CD is closed at year 2, the effective yield is still a respectable 1.25% which is higher than Discover Bank's 2-year CD yield (1.10%).

With the new early withdrawal penalty, the 10-year CD won't be nearly as good of a deal when closed early. In all cases, you'll do better with a shorter-term CD rather than the 10-year CD closed early. However, as the time to closure lengthens, the early withdrawal penalty has less impact. For example, at year 2, the effective yield is 35 bps lower than the 2-year CD APY (0.75% vs 1.10%). At year 5, the effective yield is just 15 bps lower than the 5-year CD APY (1.50% vs 1.65%).

The early-withdrawal yields listed below are based on the spreadsheet developed by Bogleheads forum members. It's available from the Bogleheads Wiki: Comparing CDs. It should be noted that the following simple formula comes very close to this spreadsheet:

Post Penalty APY = (Full APY) x (D - P) / D

D = days into term when the CD was closed.
P = days of the early withdrawal penalty

If you want an easy way to calculate the effective interest rates on your own, a reader developed this useful online calculator. It can calculate the effective interest rate for any month that a CD is closed before maturity.

These CD APYs are based on the yields listed at the Discover Bank's website as of 2/20/2013:

Year of Early Withdrawal Old Discover 2.00% 10-yr CD latest rates Old Discover 1.65% 5-yr CD latest rates New Discover 2.00% 10-year CD latest rates New Discover 1.65% 5-year CD latest rates
Early Withdrawal Penalty 9 months 6 months 15 months 9 months
year 1 0.50% 0.82% -0.49% 0.41%
year 2 1.25% 1.23% 0.75% 1.03%
year 3 1.50% 1.37% 1.16% 1.23%
year 4 1.62% 1.44% 1.37% 1.34%
year 5 1.70% 1.65% (no penalty) 1.50% 1.65% (no penalty)
year 6 1.75% n/a 1.58% n/a
year 7 1.78% n/a 1.64% n/a
year 8 1.81% n/a 1.68% n/a
year 9 1.83% n/a 1.72% n/a
year 10 2.00% (no penalty) n/a 2.00% (no penalty) n/a
  Tags: Discover Bank, CD rates

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Comments
7 comments.
Comment #1 by Anonymous posted on
Anonymous
When the interest rate goes up, they will not allow any withdrawals, so the penalties are irrelevant.

13
Comment #2 by Anonymous posted on
Anonymous
This is a very helpful chart to see the before and after differences.  No way would I grab the 10yr under the new terms.  It's not that great unless your in the 10th year.

5
Comment #3 by Wanderer (anonymous) posted on
Wanderer
It seems to me that this, combined with the two credit unions which managed to shaft their customers by unilaterally changing the terms of a contract, after the fact, illustrates the foolishness inherent in opening a CD and relying on the ability to do an early withdrawal. You end up tying up your money for what is often an incredibly long time, with nearly no interest, and no right to change anything. In contrast, the financial institution ends up with the right to unilaterally change your agreement whenever it chooses.

Our incredibly shortsighted (or outright corrupt if we are speak honestly) government regulatory bodies (NCUA and FDIC) say that it is perfectly okay for fnancial institutions to do that! So, you'll receive no help there. What is to say that the financial institution cannot unilaterally change the CD contract to a different, longer term? If NCUA approves the one, why not the other? In at least one foreign nation, immediately after the world financial crisis, one government enacted legislation voiding bank depositors right to withdraw from time deposits. It would be naive to think, given NCUA's position on early withdrawal changes, that it could not happen in the USA.

This is one of many reasons I steer clear of CDs, especially long term CDs. With a new price attack by the casino bankers against precious metals now ongoing, I'll be deploying the funds that have been accumulating in my money market and checking accounts to buy more. These will be kept, as always, in the Wanderer's personal vault!

5
Comment #4 by Anonymous posted on
Anonymous
If someone wanted to force the issue, I believe the credit unions would ultimately lose in court for breach of contract.  I totally agree about staying away from long term CDs.  Nothing longer than one year for me.  The rates on savings accounts are nearly the same, so why tie up your money in a CD?

I'm looking at picking up some metals on sale too.  If spot for gold drops to around $1500, I'm a buyer.

2
Comment #5 by Anonymous posted on
Anonymous
They can change the agreement at anytime with 30 days notice.  SO if rates go up .. They can raise the penalty or restrict early withdrawls

2
Comment #6 by Anonymous posted on
Anonymous
Item 26 in the agreement .. They can change the terms with 30 days notice.  It says if the change "adversely" affects you the CD can be closed without penalty.  They control the deck

2