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Retirement Savings: How Much Should I Save Each Month?Discover Bank Raises Long-Term CD Rates But Beware of Larger Penalties
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.
| APY | MIN | MAX | INSTITUTION | PRODUCT | DETAILS |
|---|---|---|---|---|---|
| 3.50% | $0 | - | Discover® | 4 Year CD | |
| 3.50% | $0 | - | Discover® | 5 Year CD | |
| 3.50% | $0 | - | Discover® | 7 Year CD | |
| 3.50% | $0 | - | Discover® | 10 Year CD |
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.
