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A CD's Hidden Attribute: The Early Withdrawal Penalty

Opening new deposit product accounts can be an involved process. Most consumers of these products, even beginners, likely know to look for competitive rates, but other less obvious considerations may be easily overlooked. Fees and penalties can very quickly affect the net gain–or loss–a consumer realizes through the life of a product, yet some of these fees and penalties are not always evident or easily understood. In many cases, information regarding such fees and penalties is not even readily available.

Early Withdrawal Penalties–A Hidden Risk to Principal

One such oft-overlooked attribute is the Early Withdrawal Penalty (EWP) on CDs, which is simply a penalty that is applied when a CD holder elects to withdraw money from a CD before its maturity. Many consumers are not aware of the existence of EWPs, and others do not pay them much attention, because their plan is to allow the product to fully mature. The problem is that life does not always cooperate with our plans, leveling blows that require unforeseen needs to access capital, including life changes such as divorce, unforeseen major expenses such as medical bills, or sometimes even unforeseen investment opportunities that require capital.

If such an unexpected situation surfaces, the cost of accessing the money in a CD before its term is complete may not only affect dividends, but also dip into the principal, leaving the consumer with less money than the original deposit. We need look no further than the Bank of America example as a historical, and somewhat humorous, representation of this. Therefore, consumers are wise to consider the EWP of a CD before making a deposit unless 100% sure they will have no reason to withdraw any money before maturity. Even then, prudence suggests a search for the lowest and/or most saver-friendly EWPs, just in case of the unexpected. (PenFed is a notable example of an institution whose CD EWPs do not eat into principal).

EWPs Can Also Be Used To Your Advantage

On the other hand, savvy consumers can find ways to use EWPs to their advantage.

On the other hand, savvy consumers can find ways to use EWPs to their advantage. Longer term CDs with low EWPs, even when broken before maturity, may still yield a higher effective interest rate than unbroken shorter term products. A consumer looking for a short term product, then, could do well to also consider investing in a longer term product with a higher interest rate and a low EWP.

For instance, a 2 Year CD with a very healthy interest rate of 1.50% would produce a lower yield over the completed term than a 5 Year CD with an interest rate of 2.20% and an EWP of six months broken after two years. Even after paying the six-month EWP on the 5 Year CD when withdrawn early, the effective interest rate over the two-year time period would still be 1.67%, a difference of 11.3% in earnings. Similar benefits can be seen when compared against shorter-term CDs (e.g. 1 Year CDs) and longer-term CDs (e.g. 3 Year CDs).

A rising rate environment presents another situation for wise consumers to use EWPs to their advantage. A sufficient increase in rates being offered on newly issued CDs may make breaking an older long term CD with lower rates–rates that were good a couple of years earlier–attractive, in order to switch to a CD that boasts higher rates. EWPs play the critical part in the math behind this decision, so understanding them well is imperative. Breaking the old CD could be a judicious move, or it could be very costly.

The Makeup of EWPs

Reading the Fine Print

EWPs take on a number of different forms and can vary widely from institution to institution and even product to product. Some are quite simple, while others are more complex. The most common form of EWP consists of a certain number of days’ interest on the product. One example is 180 days’ interest on a 2 Year CD. The penalty here is very simple: removing money from the CD before maturity costs the consumer 180 days’ interest on the principle.

Not all EWPs are that simple, however. Many financial institutions’ EWPs are far more complicated. The following are a few examples of more complex EWPs:

  • Specified number of days’ interest plus a flat fee
  • Specified number of days’ interest, additional flat fee, and cancelation of the CD
  • Specified percentage of the principal
  • Specified percentage of the amount withdrawn

These are more complex than the prior simple examples, but they are far from the most elaborate and tricky EWPs. Though an atypical example, one bank’s EWP is far more convoluted. Early withdrawal on any 18-60 Month CD holds a fee of 180 days’ interest. On top of that cost, the rate of the CD is lowered to that of a savings account, currently equaling a reduction in rates greater than 75%.

Historically, some institutions have not allowed early withdrawal at all, and, as it turns out at least two institutions have retroactively changed the EWP on existing CDs. More concerning than the midstream change was the review of the change by the NCUA who ruled it permissible. You can read more on the bank disclosure that allows this sort of midstream direction change here. So, not only can EWPs be difficult to find and confusing once they are found, but they can also apparently change without warning, even on existing CDs. All things considered, understanding the EWP on a given CD product from an institution is imperative, which leads to another issue…

Where to find the EWP on a Product

Reading the Fine Print

Recognizing the importance of understanding a CD’s EWP is one thing; finding the pertinent information on it can be quite another. According to our research, only 44% of financial institutions that post product rate and fee information online also include CD EWP information on one or more of their CD products on their websites. Those that do often post this information in the tiny legal print at the bottom of the page or buried in separate embedded PDFs that can be thirty or more pages in length. Even when the information is accessible, it may be written in vague language that leaves a potential consumer confused.

Recognizing the importance of understanding a CD’s EWP is one thing; finding the pertinent information on it can be quite another.

Ostensibly, one might consider a call or online chat with a customer service representative a valuable manner in which to garner the needed information. Unfortunately, CSRs quite often lack the necessary information to satisfy all of an informed consumer’s questions, even though that data may eventually prove very important to the consumer. The DepositAccounts team speaks daily with CSRs from various institutions, and the stories we could share regarding interesting and less than helpful CSR experiences are numerous. From a lack of information to inaccurate information and everything in between, procuring the correct information from those people meant to help you find it can be quite an adventure. Indeed, we estimate that approximately 20% of our interactions with CSRs produce either no results or the wrong results, so be careful out there.

Visiting a branch in person can be just as frustrating. In both cases, plan on bringing a little persistence and patience to the conversation, as you can usually (though not always) work your way up to someone who can provide the necessary information. Once the information has been procured, whether through phone call, online chat, or visit to a physical location, it is always a good practice to request the EWP information in writing from the financial institution before opening the CD.

Using DepositAccounts to Find EWP Information

We at DepositAccounts are working hard to help find the pesky EWP information that is often so difficult to locate. By way of our patented technology, we are currently tracking information regarding EWPs on 10,868 CDs from 2,174 institutions. [As helpful as that information can be, however, it should be noted that consumers should always verify the specific details with the institution before opening the CD.]

The information we gather on EWPs is one piece of a broader set of information that we gather and publish regarding the hundreds of thousands of individual deposit products we track (in this case, the CDs). The first place EWP data may be accessed is within the individual product listings within our CD rate tables (links to the CD rate tables can be found in the top menu bar on the site). When you have clicked within a table (example: 5-year CD rates), the table will open, displaying a list of the top rates for that product category along with the "Details" button on the right side of each product that will expand the view, offering a wealth of information on the selected product (note: if you are not logged in as a DepositAccounts user, you might see one or two sponsored results at the top and denoted as such; scroll down just a bit to the full rate table results immediately below that). Here is an example of an expanded ‘details’ view for an individual CD product listing for which we are tracking EWP information (notice the EWP information outlined in red in the below screenshot):

CD Rates Table

EWP information is also available on the CD products listed within the individual institution "hub pages" for each bank and credit union. Among other ways, these institution hub pages may be found by searching for the institution’s name in the search box in the top right of the site. The institution hub page contains dedicated institution-specific information including an institution overview, links to previous blog and forum posts pertaining to that institution, user reviews, a proprietary health rating, location information, and information about that institution’s products offered and current rates. When available, EWP information may be found by expanding the details of each of the individual CD products listed within the rates section of the institution’s hub page. The following image is from the page dedicated to First Internet Bank of Indiana:

First Internet Bank of Indiana CD Rates

This product information may also be available within blog posts on the site pertaining to particular CD products, such as this one regarding a competitive rate on a 5 Year CD from Firelands Federal Credit Union. This particular post details the product–including the EWP–and its availability. Look again for the "Details" button at the top right of the product listings embedded within that blog post:

FFCU Blog Post Rates

Also included is relevant information on the institution offering it and comparison to other similar products. Articles such as these are added to the site daily – be sure to utilize the ‘details’ expand arrows when you see them to review this additional information regarding the products being blogged about.

Helpful Tools

Use our Early Withdrawal Penalty and When to Break a CD calculators to help you make the most informed choices.

DepositAccounts has developed a couple of tools specifically designed to assist consumers who desire to take advantage of EWPs for gain. The first is our Early Withdrawal Penalty Calculator, which does exactly what it sounds like it does. Users enter the relevant information regarding the term length, APY, and EWP on a product or products (or they utilize the tool’s search functionality to select the CD in question from our database of products in order to have all of that information automatically populated by the tool). The calculator then determines and displays the effective return, after the EWPs is applied, at month-by-month intervals throughout the life of each of the CDs being compared. This tool and the information it produces are a very simple way to determine whether or not a consumer might be better served to choose a shorter term CD and hold it to duration or to choose a longer term CD with a higher rate and then plan to break it at an earlier date.

The second tool is the When to Break a CD Calculator, which is helpful when trying to determine whether or not breaking an existing CD in order to invest in another new CD (with a higher rate) would be prudent. As mentioned above, such a move could be wise or costly, and the EWP is the major determining factor. This tool can help decipher whether or not breaking the CD will be profitable.

EWPs – Your Friend or Your Foe?

EWPs can be either an unwanted surprise for the unsuspecting consumer on one extreme or a profitable tool in the hands of a sage consumer on the other. In any case, extreme or not, it is an important attribute that need not be overlooked, as it so often is. In the coming days, we plan to publish a couple more articles delving into the aggregate data and some notable examples of the most saver-friendly EWPs, so stay tuned! And in the meantime, please share some of your favorite (or most painful) stories and strategies around this subject in the comments below.

Related Pages: CD rates
  |     |   Comment #1
And they can change the terms anytime......So you have no idea what the EWP is going to be. I would highly advise anyone considering a CD to plan to keep it to maturity .....Otherwise you will get completely %$#@&*
  |     |   Comment #2
Ken you are on the mark with all you have said above. I have gone through crazy stuff with CSR's... Most are not trained or not even told of the EWP,s ;; They just don't know.. You must always get a supervisor and she must call to find out..I wish someday more laws will address this.... Vote
  |     |   Comment #10
Financial professionals often have no interest in finance .
  |     |   Comment #3
Knowledge is power.

I simply adore it.
  |     |   Comment #4
I think your blog is super but I don't understand why you don't just advise your readers to not open a CD unless allowed changes to the EWP,  interest rate, term, and similar important details are explicitly stated in a language that everyone can understand. The fine print and vague language that CEFCU and Fort Knox CU had (and probably still have) in their CD disclosures are contrary to your attempts to have informed customers for banks and credit unions. More and clearer information should be a goal for every good bank or credit union that does not want to be tainted by the actions of a few like Valor and the two mentioned above. The regulators are a joke. The only solution is to inform the would-be consumers of these products of the dangers they pose. Keep up the good work.
  |     |   Comment #5
A typically excellent article, Ken.  From a contract law perspective, the rights and remedies of an aggrieved depositor would vary considerably, depending on the written terms.  If, for example, the fine print gave the bank or CU the right to deny early withdrawal requests entirely, that restriction would likely be honored.

But I have serious doubts about whether the general "we reserve the right to change this agreement upon 30 days' notice" provision (often in a different document than the one stating the EWP) gives the institution the right to vary the EWP on existing CDs.  Those terms are as much a part of the economic deal as the interest rate itself, or the duration of the term.

Unfortunately, the NCUA did not distinguish itself in the Fort Knox CU debacle.  It remains to be seen if the FDIC and the CFSB will do a better job in protecting depositors.  Alternatively, most courts of law would probably construe these "contracts of adhesion" in a way that resolved ambiguities in favor of the consumer.  But a lawsuit would likely be prohibitively expensive for any given individual, so the only recourse (apart from robust intervention fro the regulators) might be a class action suit. 
  |     |   Comment #11
You mean CFPB?
  |     |   Comment #6
Excellent and thank you.
  |     |   Comment #7
Superbly written Ken; thank you (again).
  |     |   Comment #8
It would be nice if we could filter or sort CDs based on EWP, not just clicking through every single one on the list to figure them out.
  |     |   Comment #9
Thanks to this site I never had to use the ewp since I get some of the highest deals available to begin with, but I understand how useful it is to know for that just in case situation and if rates rise aggresively
  |     |   Comment #12
You have to remember too that if some major economic event the government can restrict access to funds at banks.  You also have to look what was done in Cyprus.
  |     |   Comment #13
If you miss the "grace period" at the end of your CD's life you may experience the joy of paying a withdrawal penalty to get your money back. The "grace" part applies to the bank, not you. Caveat Emptor, or at a minimum track your accounts closely!
John Sears
  |     |   Comment #14
This again confirms to me the wisdom of opening a strong 5 year CD such as Synchrony or Barclay and after 14-15 mos., you're ahead of the best 1 year CD.  Keep it in there until a better CD comes along, if it doesn't, you're still doing better than reinvesting the money in another 1 year CD, but it seems to be a much better approach than laddering.
  |     |   Comment #15
Plan accordingly and ten year CD's eventually become "laddered". When I look at my spreadsheet I'm amazed just how fast time passes.
  |     |   Comment #16
Your heirs will appreciate it!  :-)
  |     |   Comment #17
My father is a great investor of his time and he makes a great business for me, and always he told me about the Annuity Calculator. My father uses this calculator for the calculation of their investment on the various businesses and he will never get lost any of his money by just because of the bad calculation of the money and years payment submission. 

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