2019 Study of CD Early Withdrawal Penalties and How They Have Changed

In 2016 we did a study on CD early withdrawal penalties (EWP). By examining EWP data from more than 1,000 institutions, we extracted average EWPs for CD terms from 6 months to 5 years. This year we looked at the data again to see how EWPs have changed. The review included EWP data from 7,562 CDs that were offered by 1,019 banks and credit unions.

As described in our 2016 overview of CD EWPs, the early withdrawal penalty is simply a penalty that is applied when a CD holder elects to withdraw money from a CD before its maturity. The EWP is intended to discourage CD holders from withdrawing money from their CD early. At the bottom of this 2016 CD EWP overview, you can see how to find EWPs for CDs listed in our rate tables at DepositAccounts.com.

The most common form of EWP consists of a certain number of days’ interest on the CD. One example is 180 days’ interest on a 3 Year CD. The penalty here is very simple: removing money from the CD before maturity costs the consumer 180 days’ interest on the principal. Not all EWPs are that simple, but the large majority are. For this study, only CDs with this simple type of EWP were included.

How CD Early Withdrawal Penalties Have Changed from 2016 to 2019

As interest rates have risen in the last few years, banks had more reason to discourage CD holders from closing their CDs early. The old long-term CDs had lower rates than new long-term CDs. Once the new rates are high enough, it becomes financially advantageous for the CD holder to close the old CD with the penalty and open the new CD with the higher rate. Raising the EWP is one way a bank can make closing CDs early less financially advantageous for the CD holder. Thus, one would expect banks to be increasing EWPs when rates are low or when they’re rising. Data that we have collected shows that is what has happened in the last three years, which has been a period of slowly rising rates.

Our study indicated that the average EWPs for all CD maturities (6 months to 5 years) increased from 2016 to 2019. The average EWPs increased the most for the 5-year CDs, rising from 242 days in 2016 to 255 days in 2019 (a gain of 5.4%). The EWP increases were generally smaller for the shorter maturities. The EWP of the 1 Year CD had the smallest increase in the last three years, rising from 119 days to 120 days (a gain of 0.8%). The following chart illustrates how EWPs have changed for the different CD maturities from 2016 to 2019.

The Best, Worst and Average CD Early Withdrawal Penalties for 2019

We pulled additional information from our EWP data as we did in 2016. First, for each CD maturity, we extracted the average, lowest (best) 5th percentile, and highest (worst) 5th percentile in order to help depositors understand what constitutes middle of the road vs. very good vs. very poor. The results are as follows:

The best and the worst EWPs changed little from 2016. The disparity between the lowest (best) and highest (worst) 5th percentile confirms the wide range of potential EWPs, once again illustrating the need for depositors to review the EWP before buying a CD. For instance, the 5 Year CD carries an EWP of 90 days on the lower end and 540 days (almost 18 months) on the higher end, a 450-day variance, while the average EWP is 255 days. A consumer who blindly buys a 5 Year CD based on APY alone, then, could be met with a relatively expensive and unwanted surprise if the need to break the CD arises before maturity. The upper end of the EWP scale on the product could cost the consumer most, if not all, of the interest earned in the time leading up to breaking it. In many cases, the EWP might even dip into the principal.

Examples of the Best and Worst CD Early Withdrawal Penalties for 2019

The following table provides a sample of EWPs for 1-year CDs from well-known institutions. The best EWP is listed on top and the worst is on the bottom. The average, lowest 5th percentile and the highest 5th percentile are also listed so you can see how these institutions compare.

The following table provides a sample of EWPs for 5-year CDs of well-known institutions in the same format as the above 1-year table.

Early Withdrawal Penalties: Internet Banks vs. Brick & Mortar Banks

In past studies, it has been clearly shown that internet banks on average have higher CD rates than brick & mortar banks. Also, it has been shown that they have lower fees. So it seems reasonable to expect that internet banks might have more saver-friendly EWPs. However, that was not the case for most CD maturities as the following chart illustrates:

As can be seen in the above chart, for all CD maturities except for the 6-month, the average EWPs at internet banks are higher than at brick & mortar banks for corresponding maturities. For 1-, 2- and 3-year maturities, the average EWPs at internet banks are just a bit higher. The average EWPs at internet banks are considerably higher for the 4-year and 5-year maturities. For the 4-year maturity, the difference is 82 days (31% larger). For the 5-year maturity, the difference is 70 days (24% larger).

This result is similar to what was seen in 2016. The primary difference is that the average EWPs of internet banks have increased more than the brick & mortar banks. That is especially the case for the 4-year and 5-year maturity.

The sample EWPs listed above offer examples of this trend. Three internet banks have EWPs at or above the highest 5th percentile (Popular Direct, Northern Bank Direct and American Express National Bank). One of these three banks, American Express National Bank, increased its EWPs in 2018. The EWP for the 12-month CD increased from 90 days’ interest to 270 days’, and the EWP for the 5-year CD increased from 180 days’ interest to 540 days’.

Why do internet banks have larger early withdrawal penalties?

CD holders at internet banks may be more willing to make an early withdrawal than CD holders at brick & mortar banks. Internet banks generally allow customers to manage accounts and move money at home with a computer or phone. Thus, it is easier for internet bank CD holders to make an early withdrawal and move the money to another bank where it can earn a higher interest rate. Internet banks may have seen this occur especially in the last three years, and thus, they have been quicker to increase the EWPs to discourage their customers from closing their CDs early.

10 Tips on CDs and Early Withdrawal Penalties

As you can see in the results of this study, there is a wide variation of EWPs. They can be harsh whether you’re at brick & mortar bank, an internet bank or a credit union. Thus, when you’re searching for CDs, the EWP is a critical attribute to review before deciding on a CD. As mentioned above, the bottom of this EWP overview article illustrates how you can find the EWPs in our rate tables. Since EWPs do change, it’s a good idea to always check with the institution on the current EWP. Below are ten additional tips related to CD EWPs that you should keep in mind as you look for CDs:

1. EWP can eat into the principal of your CD. In other words, you can lose money if you close a CD early. Typically, this occurs when the CD holder makes an early withdrawal soon after the CD was opened. For example let’s assume a CD has an early withdrawal penalty of six months of interest. If you close the CD two months after you opened it, you may not only lose all two months of accrued interest, but you may also lose some of your principal equal to four months of interest. This is not always the case. Some institutions have EWPs that specify that the EWP will be the lesser of a fixed penalty (i.e. six months’ interest) and all accrued interest. That prevents the EWP from eating into the principal.
2. EWP generally does not apply to accrued interest. If you open a CD and specify that interest to be credited back to the CD, this interest can add up to be a substantial amount, especially on long-term CDs. Many banks allow you to withdraw accrued interest before maturity without a penalty. Check the bank’s account disclosure to ensure this is the case.
3. EWP does not apply during the CD grace period. Banks generally set up CDs to automatically renew when they mature. On the day of the maturity or during the grace period, the CD holder can choose to close the renewed CD without a penalty. Most grace periods are ten calendar days, but they can be shorter or longer. Even though there is no penalty, you may lose any interest that accrues during the grace period. Be sure to check the CD disclosure before opening the CD.
4. When a CD automatically renews at maturity, a new EWP may take effect. It’s important to not only review the new rate for the renewed CD, but also the CD terms, including the EWP.
5. The EWP typically does not change on a CD after it is opened and before it matures. The EWP in effect at the time it is opened should remain in effect until the CD matures. However, there have been at least two documented cases when credit unions have increased the EWP on existing CDs that had not yet matured.
6. Some banks and credit unions have language in their CD disclosures that allows them to refuse an early withdrawal request. Although CD early withdrawal refusal by a bank or credit union is rare, it is possible. Review the CD disclosure for this type of wording.
7. EWPs are typically waived by institutions if the CD holder dies, becomes disabled or becomes legally incapacitated. Also, it is common for an institution to waive the EWP if the CD holder has an IRA CD and is making a required minimum distribution (RMD). A few institutions will waive the EWP when the IRA CD holder reaches the age of 59 ½, but this is not common.
8. No-penalty CDs are now available at a few internet banks. These CDs typically allow you to close a CD with a full withdrawal before maturity without any penalty. The only withdrawal restriction or penalty is during the first six days from account opening which is required by regulation. Most of these CDs have maturities around one year. The downside with these no-penalty CDs is rates that are lower than the rates of standard CDs with comparable maturities.
9. You can evaluate the EWPs of CDs and see the effective yields when the CD is closed early by using our CD Early Withdrawal Penalty Calculator.
10. Use our “When to Break a CD Tool” to determine the financial gain or loss of breaking a CD and reinvesting the money into a higher-rate account.