I received confirmation yesterday that Barclays has increased the early withdrawal penalty (EWP) on new CDs. There was some confusion over the weekend when a reader first noted the change in Barclays’ Terms and Conditions document. Barclays had forgotten to update its FAQs so there has been a discrepancy between the T&C and the FAQs. I was also worried yesterday when I first contacted Barclays customer service. I was told that the EWP did in fact change. When I asked if this only applies to new CDs, the CSR said he would have to get confirmation on this. I then sent an email to my Barclays contact describing these issues. My Barclays contact did confirm the new EWP, and she said that the FAQs are “in the process of being updated” and should reflect the changes as early as Tuesday. And Barclay customers who already have CDs don’t need to worry. According to my Barclays contact:
The new penalty pricing is only applicable to CDs that were/are opened from March 16th, 2013 forward. All CDs opened prior March 16th, 2013 are still regulated by the old terms (90 Days of Simple interest)
The new EWP is a disappointment, but it’s still competitive compared to other banks and credit unions. In summary, CDs with terms over 2 years now have an early withdrawal penalty of 180 days of interest. Here’s an excerpt of the new Barclays T&C document showing the new EWP:
Penalties for Early Withdrawal. A penalty will be imposed for any withdrawal of principal from your CD Account before maturity. If the amount required to be forfeited is greater than the interest earned or paid on your CD Account, we will deduct the difference from principal. For a CD Account with a term of 24 months or less, a penalty equaling 90 days simple interest on the amount withdrawn subject to penalty will be imposed, and for a CD Account with a term of greater than 24 months, a penalty equaling 180 days simple interest on the amount withdrawn subject to penalty will be imposed. In certain circumstances, such as the death or incompetence of a CD Account holder, the law permits, and in some cases requires, the waiver of the early withdrawal penalty.
Thanks to DA member KevinM who first reported on this change in the forum.
As DA member SnowSkier mentioned in the forum, this incident highlighted three issues with Barclays:
- Barclays competence. Can't draw any conclusions yet, but having FAQ and T&C out of synch at minimum seems to be an operational mistake. Where there is one operational error, there are often more.
- Barclays communication & transparency. I haven't received anything yet that communicates a change from 90d to 180d.
- level of Barclays customer support relative to Ally. Looks like no way to chat or call if it's not M-F.
On the issue of communication, I think Barclays management felt that since this change only affected new CDs opened on March 16th or later, a notification to existing customers wasn’t necessary. What do you think?
In my opinion, some customers may have opened new CDs and had assumed the 90-day penalty was still in effect. This shows why it’s important to read the latest T&C/disclosure document before opening a new CD and before you let a CD renew. To their credit, Barclays does have the T&C document online. Several banks and credit unions don’t have their disclosures online.
Even though customers should have read the T&C before opening a new CD, Barclays could have done more to ensure customers weren’t surprised by the change. An email notifying customers of this change would have reduced the chance of customers missing this change as they opened new CDs. Also, some customers may have only depended on the FAQs. To be fair, in my opinion, customers who had opened new CDs after March 15th and before the FAQs are updated, should be grandfathered in with the old EWP.
Barclays joins many other banks that have increased their early withdrawal penalties. Just last month Discover Bank announced the increase of its early withdrawal penalties on its long-term CDs. In my opinion, Discover handled the change better than how Barclays handled it. First, Discover clearly stated the date of the change in its disclosure so it was clear that the new EWP wasn’t going to affect existing CDs. Second, it removed the old EWP description from its FAQ and replaced it with a link to the disclosure.
When Discover Bank announced the EWP increase last month, several readers commented that these types of changes show the risk of depending on early withdrawals. When interest rates finally rise, the early withdrawal may either be not allowed or more costly than had been planned. However, Barclays has followed many other banks that have done the honorable thing by only increasing the EWP on new CDs. Only two credit unions have decided to take the low road. So in my opinion, these latest bank actions are increasing the chance that banks will act honorably in the future. There’s no guarantee, but don’t forget the risk that interest rates will remain low for many years.
Impact to Barclays’ 5-Year CD
I thought it would be useful to update the EWP table for Barclays’ 5-year CD with the new 6-month EWP. This table shows how the EWP will reduce the effective yields when the CD is closed early. For comparison purposes, I’ve included Barclays 5-year CD with the old 90-day EWP and Ally Bank’s 5-year CD with its small 60-day EWP.
As you can see in the table, most of the impact of this change is early in the term. Barclays’ new 5-year CD yield when closed after two years is close to Ally’s 5-year CD. At year 3, Barclays takes the lead. So Barclays’ 5-year CD is still a good deal even with this larger EWP.
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 Barclays and Ally Bank's website as of 3/19/2013:
|Year of Early Withdrawal||New Barclays 1.85% 5-yr CD latest rates||Old Barclays 1.85% 5-yr CD latest rates||Ally 1.54% 5-year CD latest rates|
|Early Withdrawal Penalty||6 months||3 months||2 months|
|year 5||1.85% (no penalty)||1.85% (no penalty)||1.54% (no penalty)|