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  2. Discover Bank Raises Long-Term CD Rates But Beware of Larger Penalties

Discover Bank Raises Long-Term CD Rates But Beware of Larger Penalties

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Discover Bank increased the rates of its long-term CD and IRA CD rates. The new rates aren’t the highest, but it’s nice to see a large internet bank increasing its CD rates. Hopefully, it’ll push other banks to follow with rate hikes. Below is a summary of the new and old rates as of 4/9/2014:

  • 2.25% APY 10-year CD (was 1.90%)
  • 2.05% APY 7-year CD (was 1.80%)
  • 1.95% APY 5-year CD (was 1.65%)
  • 1.60% APY 4-year CD (was 1.50%)

Minimum deposit is $2,500, and these same rates apply to Discover IRA CDs.

APYMINMAXINSTITUTIONPRODUCTDETAILS
3.10%$2.5k-Discover Bank10 Year CD
3.05%$2.5k-Discover Bank7 Year CD
3.00%$2.5k-Discover Bank5 Year CD
2.75%$2.5k-Discover Bank4 Year CD
Rates as of November 16, 2018.

Larger Early Withdrawal Penalties

I just noticed another change at Discover Bank. In February its early withdrawal penalties increased. This is the second increase within the last year. The first increase occurred on March 2013. This second increase took effect on February 17, 2014. Below is a summary of how the penalties increased in February:

  • 5 year CD: EWP = 18 months simple interest (was 9 months)
  • 7+ years CD: EWP = 24 months simple interest (was 15 months)

One important thing to note is that these changes do not affect existing CDs. They only affect CDs opened or renewed on or after 2/17/14. For the full EWP details, please refer to this Discover Bank FAQ page.

To see how these changes the effective yields when you close the CDs early, please refer to this Early Withdrawal Penalty Calculator table which has the current Discover Bank 10-year CD with its new EWP. In addition, it has this 10-year CD with the old EWPs. If the new CD is closed after 2 years, essentially all interest earned will be lost. So the effective yield is zero. If the old EWP of 15 months interest was still in effect, the effective yield would be 0.84%, and if the pre-2013 EWP of 9 months interest was still in effect, the effective yield would be 1.41%. As you can see, the new EWP makes early closure much less attractive.

Slightly Higher Rates for AAA Members

If you’re an AAA member, you can get a small rate bonus on some of Discover Bank CDs. It’s only 5 basis points, so it’s probably not worth extra effort. But if you’re already a member and you are opening a Discover Bank CD, it makes sense to make use of your AAA membership. Below are the CD rates with the AAA-rate bonuses as of 4/9/2014:

  • 2.00% APY 5-year CD (1.95% for non-AAA members)
  • 1.10% APY 2-year CD (1.05% for non-AAA members)
  • 1.00% APY 1-year CD (0.95% for non-AAA members)

I have more details on this AAA bonus rate in this post. Discover Bank used offer the rate bonus on all of its CDs. Discover Bank also has agreements with other organizations including American Association of Individual Investors (AAII). AAII members still get a 5bps rate bonus on all products. Discover Bank used to have a relationship with BJ’s Wholesale Club, but that was discontinued on January 2014.

Bank Overview

Discover Bank is one of the largest internet banks. It has over $77 billion in assets and $44 billion in deposits. Its overall health grade at DepositAccounts.com is an A+ with a Texas ratio of 5.91% (excellent) based on December 2013 data. Please refer to our financial overview of Discover Bank for more details. The bank has been a FDIC member since 1934 (FDIC Certificate # 5649).

Searching for the Best CD and IRA CD Rates

To search for the best nationwide CD rates and the best CD rates in your state, please refer to the CD rates and the IRA CD rates tables.
Related Pages: CD rates, Discover Bank, Salisbury, IRA rates

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9 Comments.
Donkey
Donkey   |     |   Comment #1
It should be noted that if you are looking at either the 7 or 10 year CD from Discover, they offer brokered CD's at much higher rates.  For example, Discover's 7-year brokered CD pays 2.55% vs. 2.05% for direct, and the 10-year brokered CD pays 3.25% vs. 2.25% for direct (yes, a full 1% more!). With such a large difference, and the harsh 2-year EWP, the brokered CD's are probably a better deal, esp. if you are certain you will hold the CD until term.  For shorter-term CD's, the difference in rates from Discover are not significant.
Reply
9
Ken Tumin
Ken Tumin   |     |   Comment #2
Thanks for mentioning the brokered CDs. That's a good point about the Discover Bank 7- and 10-year brokered CDs. I have some more info on brokered CDs in the August blog post. 
Reply
7
Anonymous
Anonymous   |     |   Comment #4
Ken, Who are the current financial institutions that are offering brokered FDIC CDs?  Re-reading your August blog...perhaps it needs to be updated as to those entities?  I have notice some banks mention brokered accounts when they indicate their current CD interest rates, e.g. US Bank participates in same as well as others.
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2
CC in CA
CC in CA   |     |   Comment #5
I guess the EWPs have increased a couple of times now since 2012.  I have 6 CDs that I opened in 2011 and 2012, all for the 10-year term, and the EWP was only 9 months (I checked the disclosures for these CDs when I saw this posting today).  I would not open a 10 year CD with a TWO YEAR penalty.  No sir, no way.  Well, not unless the rate were THAT much higher to justify the EWP risk.
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7
QED
QED   |     |   Comment #6
You make good and valid points.  Be watchful, though, that they don't try to exploit some loophole and raise the EWP on your existing CDs.  Nine months on a ten year is really favorable for you as lender, but increasingly disadvantageous for them as borrowers. 
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7
Anonymous
Anonymous   |     |   Comment #9
CC/QED...you have a "put" coupled with the CD, i.e. a right to sell it or terminate it at a cost of what the stipulated EWP is...clear/clean and simple.  That is your argument to frustrate any attempt by the issuer to increase the cost of your put, i.e. raise the EWP
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2
Anonymous
Anonymous   |     |   Comment #7
Oh well, that's what happens when people try to take advantage of the system.  The original idea behind CDs were the banks and CUs offered a fixed percentage of interest for a fixed period of time.  Now a lot of people want to trade CDs like they do stocks and bonds.  I do not blame the financial institutions for imposing severe penalties or even refusing an early redemption for people wanting to brake a contract. 
Reply
5

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