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Are You Ready for a Cashless Society?Beware of Certificate of Deposit Gotchas
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.
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.
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.
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.
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.
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.
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.
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.