It happened to Becky, a mother of three. In June, she opened a $20,000 bank CD paying 6 percent interest, but this month she had to withdraw $10,000 to cover one child’s college tuition.
The bank zapped her one year’s worth of interest–$600–as the penalty for early withdrawal of the amount borrowed, even though the account had earned only $200 thus far. In other words, the penalty cut into the principal on Becky’s investment.
Welcome to the banking world, where you get nailed if you touch any of your dough before your CD matures.
Bank “fees” and “charges” are going up on ATM use and just about every other type of banking transaction.
But penalties are something else: You get slapped when you break the rules, or even when you don’t do something the bank expects you to do.
CD early-withdrawal penalties may be the harshest of all. How much you’ll be charged depends on the maturity date of the CD, based on whether it’s less than one year or more than one year.
Way back in 1983, the federal government told banks they could ease up on these penalties if they wanted to. Instead of charging at least six months’ worth of interest on early withdrawals for CDs of more than one year, the government said banks could lower that penalty to three months’ worth. And instead of charging three months of interest on accounts of less than one year, they could charge just one month’s worth. Later, the penalty requirements were all but eliminated.
But guess what’s happened? Not much. Most outfits still hammer customers with the old, stiff penalties of 14 years ago. The longer the CD maturity, the more you’ll have to cough up.
A Bank Rate Monitor spot check of some of the nation’s highest-yielding institutions shows that, currently, two-thirds still sock you with three months of interest on CDs of under one year. More than half charge at least six months on CDs of a year or more, and one of every four deducts a full year of interest!
Putting it another way, you could lose all the first-year interest on your savings if you touch so much as a dime of your money.
Indeed, most institutions say the way they calculate their withdrawal penalties is on the basis of simple interest–regardless of how the interest earnings are compounded.
But every one of the banks surveyed said that if not enough interest has built up in the account at the time of withdrawal, they’ll tap into your principal to cover the penalty.
What about those “no-penalty” CDs you see advertised? Sure, there are some available, but not very many. Under the rules, a bank must charge a penalty if you withdraw within seven days of opening an account, but after that it may offer a no-penalty deal.
But be cautious: Many of the no-penalty promotions aren’t for CDs but for on money market accounts, which normally don’t charge such a penalty.
Yet, penalties are creeping into MMAs in other ways, such as nicking the customer with a $15 or $20 charge if he closes out his account within just a few months of opening it.
The range of penalties on CDs is extraordinary, according to BRM’s poll. For example, Atlanta Internet Bank charges only seven days of interest if the customer withdraws funds from a CD of less than one year. But at KeyBank USA in Albany, N.Y., withdrawing from a 2 1/2-year CD costs nine months of interest, and on a five-year account it’s one year’s worth. In Chicago, both LaSalle Bank and Pullman Bank and Trust charge nine months on a five-year CD.
Follow these tips:
– Quiz the bank about penalties before you open a CD account, not afterward.
– Ask the bank to explain each penalty in simple dollars and cents. Some of the rules are written in complicated, long-winded gobbledygook.
– Invest only as much money as you know you won’t need during the term of the CD. If you’ll probably need emergency cash down the road, park that amount in a penalty-free money market account yielding 5 percent or more.
– If you must tap into a CD you recently opened, it may be cheaper to get a home equity loan or a cheap credit card at 8 or 9 percent than to chew into your CD principal.
– Latest rate trend. With the Fed taking no action, mortgage rates backed down to 7.44 percent on 30-year fixed rates. CD yields are ice cold.
– Credit card tip. If it’s a lower credit-card rate you’re after, consider credit unions. They often have lower rates than banks or thrifts and many have no annual fee.
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Robert Heady publishes Bank Rate Monitor, a newsletter based in North Palm Beach, Fla.
