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For Top Rates, Can Credit Unions Compete?10 Gotchas to Avoid for Bank CD Investors
POSTED BY Ken Tumin
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.
- 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.
- 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.
- 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.
- 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).
- 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).
- 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.
- 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)
- 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.
- 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.
- 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.
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.
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!
“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
Also, thank you for supporting "Truth in Advertising" with a memorably funny "also known as" name for that credit union. :D
Thus, it never hurts to ask "Is the rate locked on application?"
"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.
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). All of the outfits I hooked up with only changed their rates, if at all, on Tuesday. Getting someone on the phone to do it for you Wednesday-Friday ensured your rate was locked in.
2). Transferring the money from another bank into a Savings Account with the CU I was considering ensured the rate wouldn't change with the money sent by check.