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Credit Unions on the Hunt for Small Banks
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Is Your Credit Union a Part of the Shared Branch Network?Useful CD Tip: Partial Early Withdrawal Without a Penalty
If you have a CD, you probably know about the early withdrawal penalty (EWP). This is the fee that you will be charged if you make a withdrawal from the CD before maturity. One thing that may not be well known is that the EWP typically only applies to a withdrawal of principal (the initial deposit). If you have established the CD so interest is added back to the CD, you may be able to withdraw that accrued interest without a penalty. This can be helpful if you need that money for some emergency. It can also be useful if you want to use that money for another CD before the rate drops.
If you think you might need the accrued interest in your CD, check with your bank or credit union to see if they will allow a penalty-free early withdrawal of the interest. Make sure to inform the CSR that your intent is to only withdraw the accrued interest and not the principal. A reader mentioned in the forum that a Capital One representative quickly and easily transferred the accrued interest of his CD into his checking account.
It's important to note that not all banks and credit unions allow you to withdraw accrued interest without a penalty before the CD matures. And if they do allow it, they may not make it an easy process. So you should first check on this in the account disclosure before opening a CD. Also, banks may require you to decide before the CD is opened about how interest will be paid (let it accrue or receive the interest by check). Once the CD is opened, they may not allow a change.
Below are 3 internet banks and the options they provide for withdrawing interest:
CIT Bank
CIT Bank provides the following information in its FAQs section regarding interest payments:
How do I receive interest?
You can allow the interest earned to remain in your account and take advantage of compounding. Otherwise, posted interest on your CIT Bank CD can be withdrawn from your account at any time by contacting our Customer Service Center at 855-GO-BANKCIT (855-462-2652). For convenient and quick access to your interest payments, we can electronically transfer the funds to the linked checking or savings account of your other bank. Or, if you prefer, we can issue and mail an official check.
Discover Bank
I can't find a similar FAQ at the Discover Bank website. However, I was able to find the following information regarding CD withdrawals from a hard copy of a Discover Bank account agreement that I received last year. Make sure to review the latest disclosure from Discover Bank before opening a CD.
You can withdraw interest that has been posted to your Account anytime during the term of your CD by:
* Registering via the Account Center to have interest automatically transferred to your Discover Money Market or Online Savings Account.
* Registering via the Account Center to have interest automatically transferred to a bank account that you designate.
* Requesting an Official Bank Check sent to you in the amount of interest posted to your CD.
If you withdraw all or part of the Issue Amount (the amount of your initial deposit or the amount of your renewed deposit in the case of a renewed CD) from your Discover CD Account prior to the day of maturity, we may charge your Account an early withdrawal fee.
Ally Bank
As I mentioned above, not all banks allow CD holders to withdraw accrued interest from a CD before maturity. Ally Bank is one of them. In Ally's account agreement, it states that "you may not make a partial withdrawal of funds you deposit in a CD prior to the maturity date". You can designate that interest be disbursed monthly, quarterly, semi-annually or annually. This can be done when the CD is opened or during the CD term. However, once interest is added to the CD, it can't be withdrawn. Here's what I was told by an Ally CSR in a chat session:
When you open the CD online or by phone the CD is automatically defaulted to have the interest remain on deposit and post at maturity. You may contact us at anytime during the term to set up interest disbursements and we can send you the interest up to the point of contacting us and going forward until the CD matures. You will not receive a penalty if you choose to have the interest disbursed.
Final Notes
One thing to remember if you decide to withdraw accrued interest from your CD is that this will slightly lower the APY. The APY is typically higher than the interest rate since APY factors in the compounding of the accrued interest. If interest isn't added back into the CD, the APY will be the same as the interest rate. In today's low interest rates, you won't see much difference between the APY and the interest rate.
Another important thing to remember is that once a CD is renewed, all of the interest that had accrued before renewal is considered part of the principal of the renewed CD.
If you need the interest you can get any time you want. monthly ect. I understood that you cant have the interest already posted to the CD, but you can change the interval of posting and recieve a check or add to savings any interest accrued after notifying them.
There is some elbow room with Ally. You can set the CD to keep funds in the account, and if you need the earned interest you can request to have the CD modified to pay out the accumulated interest on a monthly or quaterly basis, so you only have to wait 1 or a few months to get the interest.
The Oct 2010 Deposit Agreement has changes from the Jan 2010 agreement that restrict some flexibilities. Section 5 now says "Annually ... we will automatically add the interest ... to the principal amount" so this can limit how much non-principal interest you can accumulate.
But even for Ken, the Ally interest payout policies must be a challenge. It's because, as someone else already has pointed out, they changed. And they were convoluted to begin with. I believe many reps at the bank itself are not all that clear on interest payout terms. I can tell you when I have tried to make changes to my accounts, re interest payout, sometimes several telephone calls were needed before finally the changes were effected. This is speculative, but it would not surprise me in the least if CD interest payout policies were continuing to evolve and change even now.
I try to make a decision each year a month or two in advance, effective on the anniversary date of my account opening. It worked for me this year. Next year? Only God knows what'll happen then. But the decision is either to fold interest back into my CD (compounding) or move the interest to my Ally checking. I don't mess with the monthly, quarterly, semi-annual, whatever, stuff. It's too complex because at Ally, as Ken already has pointed out, a decision to compound interest is a decision to either leave the interest on deposit until CD maturity or agree to a penalty on early interest withdrawal. And agreeing to a penalty on early withdrawal of interest is a big deal to me. Just to me. Not trying to convert you to my way of thinking about this. Just telling you how I look at it.
Ken already, in this article, has pointed out that at many other institutions credited interest can be withdrawn at any time penalty free. I'm pretty much accustomed to that privilege. I suppose that's why Ally's way of doing things is, for me (only), noteworthy. Ally's way, to me, is different from my personal norm. I deal with it as best I can.
What they earn is the difference between what they are paying their members and the return they can make. If they pay their members 1.00% in savings, they have to find a CD, Bond, or Treasury paying better. The spread they make has to cover all of their expenses. Pairing all savings dollars with long term investments just to get some yield would have a diasastrous outcome if rates rise.
The 0.50% I refer to is the spread some are making, not the yield on their money. However, have you checked out money-market rates lately. A credit union can't just go plunk down their money in any old bank account. Most banks won't take it and they are left earning what their corporate credit union or fed funds is paying. Which on a good day is about 0.25%. And even if they found a decent money market rate, they can only put $250K at each bank. When we are talking about millions in excess funds ($ they can't lend), chasing money market rates in $250K increments wouldn't be a very good use of their time.
Second, a previous commenter took a shot at credit unions for having abysmal rates and operating just like banks. Sorry Ken, for taking this off on a tangent and responding.
I was pointing out that they can't pay out more than what they are earning. Matter of fact, even though credit unions are non-profit, they still have expenses so in fact need to have a yearly postive cashflow.
Sure they can lend. Lending is not risk free. However, they can only lend to people that fit within their membership groups, so they can't in fact just lend to anyone. Auto loans are around 3.50%. If they are paying an average of 1.00% for the deposits to lend, that gives them 2.50% to cover expenses and have postive cash flow. If they are earning 8 - 12% for quality personal loans, that leaves them more. Of course, they only earn it if they are paid back. Although, I wonder how big the market is right now for quality personal loans.
If a credit union paid too much above bank rates, they would be flooded with cash that they don't need and can't infact, lend. I have credit union clients paying almost nothing and are still being flooded with cash, cash that they are unable to lend. And as I pointed out, their investment alternatives aren't very good either.
I'm sure if a credit union could afford to pay 5%, they would love to. They can't.