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For Top Rates, Can Credit Unions Compete?Improvements Made to Our CD Early Withdrawal Penalty Calculator
We have made improvements to our CD early withdrawal penalty calculator. I first introduced this tool in 2013. It’s designed to help you compare CDs taking into account both the CD rates and the early withdrawal penalties (ewp’s).
If this is finally the year that the Fed starts to raise interest rates, we may see some significant CD rate hikes in the next couple of years. That can be worrisome if you’re opening a CD today, especially a long-term CD. No one wants to be stuck in a low-paying CD as rates increase. One way to avoid this risk is to stick with short-term CDs. However, it’s very hard to find any short-term CD rates that are much higher than the top internet savings account rates. Another option is to choose special bump-up CDs like Ally’s Raise Your Rate CDs that allow you to bump up the rate to take advantage of rising rates. Like short-term CDs, these rates are also not much higher than the top internet savings account rates.
If you need the higher rates offered by 5-year CDs but you’re concerned about being stuck in a low-rate CD if rates rise, it’s important to include the early withdrawal penalty in your CD shopping. That’s where our CD EWP calculator comes in.
Details of the Changes
The changes to the EWP calculator make it easier to add CDs to the table. You can now search for a bank or credit union within the calculator. Once you find it, you can select the CD. The tool will then automatically insert the early withdrawal penalty for that CD.
The calculator by default includes three internet bank CDs that have a decent combination of competitive yield and reasonable ewp. You can add two additional CDs to the table. This will allow you to compare up to five CDs at one time. You can always clear away the default CDs or the CDs you have added using the clear buttons below the ewp listing.
Clicking on the name of the institution will take you to our hub page for that institution that includes all the information that we have for that institution.
Please be aware that we don’t have the ewp’s for all banks and credit unions. In some cases, the institution has a complex ewp that can’t be easily calculated. Also, please be aware that institutions have been increasing their ewp’s. While we try hard to have the latest rates and ewp’s, there may be slight delays before we have everything updated.
How the CD Early Withdrawal Penalty Calculator Works
Once you choose the CDs to include in the table, the calculator works just like it did in the past. It shows the effective APYs when closing a CD before maturity. These APYs are the penalty adjusted net yields which take into account the effects of the early withdrawal penalties. When long-term CDs have small penalties, these penalty adjusted net yields are often higher than short-term CD yields.
We provide two tables. The top short table is the "Effective APY By Year" which lists APYs for each year until the longest-term CD matures. Under this is a long second table which lists APYs for each month.
You can access the EWP calculator using this link or from our home page where it’s listed at the bottom under the Calculators section.
Risks of Depending on CD Early Withdrawals
Comparing the yields if the CDs are redeemed early assumes that the customer will be able to close the CD early with the early withdrawal penalty specified at the time the CD is opened. As I've explained many times, there are two risks if you plan to make use of an early withdrawal:
- The bank refuses to allow an early withdrawal
- The bank increases the early withdrawal penalty on your existing CD
Every now and then a bank or credit union does something that highlights these risks. In 2012 Ally made us worry about this when it updated its CD disclosure to include language giving them the right to refuse an early CD closure. Ally joined other banks that have language in their disclosures which gives the bank the right to refuse an early closure. I reviewed these banks and credit unions in this 2011 post.
About the risk of banks increasing the early withdrawal penalties on existing CDs, there have been at least two cases of this at credit unions. The last one was in January 2012. Even though the NCUA did allow one of these credit unions to increase the early withdrawal penalty on existing CDs, it did require that the credit union notify members at least 30 days before the change took effect. That will at least allow members to redeem their CDs before the new penalty takes effect.
The real problem with early withdrawals is determining what the new rate must be to make the penalty (loss of past and future interest) worthwhile. A simple rate difference usually doesn't work when the CD has matured a few years, especially with 12 month penalties. Like all moving targets, chasing CD rates is a challenge.