About Ken Tumin

Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Automatic Renewals Can Be Costly for CD Investors

One aspect of CDs that can be costly for CD investors is the automatic renewal. 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.

When a CD matures and automatically 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. Even if you miss the grace period by one day, the early withdrawal penalty can be as high as if you had tried to close the CD a year later.

A reader recently described in the forum how he was hit with a huge early withdrawal penalty when he was a little late closing his CD at Intervest National Bank. Unfortunately, Intervest's EWP is very harsh. According to the disclosure, for terms over 1 year it's the "amount of interest for 1/2 of the term of the certificate of deposit, earned or unearned." For a 5-year CD that's 2.5 years of interest. For many 5-year CDs the EWP is only 6 months of interest of less. Also note the last part of the sentence "earned or unearned". Even though the Intervest CD was just renewed, the penalty still included 2.5 years of interest. Thus, part of the principal was lost.

Automatic renewals are common at banks and credit unions. They will usually mail you a reminder a month or so before maturity, but those mailing can be easy to miss especially if you often take long trips. If you decide to open a CD, it's critical that you mark your calendars. I find Yahoo Calendar very useful. It can email you reminders, and the reminder can be for a date several years in the future.

Even if you think it's likely that you'll want to renew the CD, you don't want to forget. You never know if the new CD rate will be uncompetitive. So it's important to review the new CD rate. Also, it's important to check if there have been any changes in the account agreement. The renewed CD may have a larger early withdrawal penalty, shorter grace period or other changes. Most honorable institutions won't make these changes on existing CDs. However, when the CD matures, the renewed CD will take effect with these new terms. This happened last year at PenFed when it doubled its early withdrawal penalty on new 5-year CDs.

Not all banks and credit unions will force you to have a CD that automatically renews. PenFed is one example. In addition to the option of having the CD automatically renew, you have the option to have the funds transferred to your PenFed savings or checking account at maturity.

Also, not all banks and credit unions have early withdrawal penalties that includes unearned interest. For these cases, the penalty will not eat into your principal. PenFed is also an example of this. Here's what PenFed's disclosure states for CD terms of 5 years or greater:

If redeemed within 365 days of the issue date or any renewal date, all dividends will be forfeited.

If redeemed thereafter, but before the maturity date, dividends for the most recent 365 days will be forfeited.

If you had set up your PenFed CD so it automatically renews and if you had just missed the grace period, you won't be hit with a big penalty. You'll just lose the interest that accrued since the day it was renewed.

Bottom Line

When you're opening a CD, it's a good idea to plan for maturity. Make sure you set up reminders so you don't miss the maturity date. Also, make sure you understand the bank's policies for CD closures. Make sure the bank or credit union makes it easy to close the CD during the grace period. As reader me1004 described, some institutions require advance notice to close a CD. Another reader also had a useful tip about knowing the methods allowed to withdraw the funds at maturity (i.e. check, ACH, wire). That can add costs and delays when you close your CD.

For more important issues, please refer to my post 10 Gotchas to Avoid for Bank CD Investors.

Related Pages: CD rates
  |     |   Comment #1
I have spoken to my banks (the ones who have the automatic renewals) about trying to get this unchecked on the form.  I don't like this idea because if one is going through a medical or other serious problem at the time, one could miss out on getting to the bank to withdraw the funds in time.  What I intend on doing, if I am able to, is writing these banks a letter stating I want to withdraw the funds upon Maturity and will ask them to either hold the check for pickup or mail it to me.  I have already spoken to the banks about this and was told I need to wait until about 30 days before Maturity Date to give or send the letter to them.  So I will try to remember to mark my calendar or notes to do this for my 5 year CDs since it is a ways off at this point.  I do not like this that the  banks can automatically mark the CDs for Automatic Renewal even if we ask them not to at time of purchase.
  |     |   Comment #2
Unfortunately, most banks don't abide by the customer's wishes to stop auto-renewal beforehand, because they know that's where they can try to pull one over on their customers. I've tried numerous times, and only one institution out of about a dozen let me do that. The others simply say "oh, we send out a letter a week beforehand."

What I do personally, is if it's in the current year, I write it on my calendar. If it's NEXT year, then on the last page of the current calendar (December) at the bottom, I always write notes for myself on what to write on the next year's calendar when I buy it. For instance, if I have a CD that matures, say, Oct 21 2013, then at the bottom of my 2012 Calendar (on the last page, December) I write a note "CD Matures Oct 21 2013!" so that at the end of the year when I buy the new calendar, I know to make sure and write it on the new calendar.  If it's more than one year away, I still do it, as a chain, year-by-year. It doesn't help if one is incapacitated, but in all other cases, it sure helps. I've had instances where the banks have NOT sent out letters (it got "lost" in the "mail"). So I never trust the banks.

Even though I deal now only with community banks and credits unions, it's still a good idea. In all my CD shopping, I never once have purposefully renewed a CD at the same institution on the same terms. It has NEVER ONCE been worth it...

  |     |   Comment #3
I agree with the post....but there are some financial institutions that want to keep your money at CD maturity and will improve their own rates or match competitors' rates. I had a one year CD mature last week. The bank's one year rate was .80% but gave me a renewal of 1.15% when they heard I was going to cash it in.
  |     |   Comment #4
If you're closing out a CD other than in person, call or email the bank first and get instructions confirming where to send your close out instructions. Then either mail your close out notice with a return receipt or, if they'll let you, fax your instructions and keep the fax receipt. A lot of banks require a signed close out notice and will not accept such notices by email. A few still require the original certificate to be returned. I've never had a problem redeeming a CD by following these basic procedures. If you're still having a hassle, demand that the bank close out the CD and place the money in a savings account until things get straightened out. That doesn't represent a withdrawal but will keep your certificate from rolling over. 
  |     |   Comment #5

In speaking with my local community bank, I was told transfering the funds to another account upon maturity of the CD does represent a withdrawal.  Also, any policies on closing a CD would be the same regardless of how it was redeemed.
  |     |   Comment #6
#5  I don't understand your post.  Are you insinuating that there are penalties associated with transferring the funds to another account at maturity?  I have never heard of that being allowed as long as you wait until maturity to do this.
  |     |   Comment #7
If anyone is looking for a Petition for Higher Savers Rates you can sign it at this site:


I know there were a bunch of readers who said they were willing to sign such a Petition.  We have a chance now to do our part and at least provide some signatures to show Washington we are serious about this concern.  Thanks!

BTW, I don't think my posting this is breaking any rules because we have discussed such a Petition on here before this one was found by another poster.
  |     |   Comment #8
Just one more trap on the long trapline of the financial industrial complex. Good luck.  Must Read; Thirteen Bankers!!

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