CD Penalty For Early Withdrawal Can Be Costly! (Really?)

I was reading this month’s issue of Kiplinger magazine when I saw the article CD Penalties Are Not Created Equal.

Cashing out before the certificate matures can be costly. The article states that the average penalty for CDs of 1-year or less is 3 months of interest. The rate can be as high as 6-months on CDs of 1-4 year maturity. Some banks will even hit you for 20-25% of the total interest you would have earned for a 5-year CD.

I’ve long known that you forfeit a percentage of the interest if you cash out a CD before it matures, but there’s a key point I never knew. It’s in the last part of the paragraph above: “…the total interest you would have earned.”

Yes, that’s right – the penalty is a percentage of what you would have earned if you left the CD to maturity. This could lead the bank to take some of your principal if you haven’t earned enough interest to cover the penalty before you cash out the CD.

That sounds pretty bad, but I don’t think it is. Let me explain…

For the sake of example, let’s suppose you buy a 5-year CD worth $10,000. 1 Year later, you realize you need that money (maybe there is some medical bill or some other unexpected expense that you can cover with your emergency fund).

• If the CD was left until maturity, you would earn $1,611.84.

• By the time you redeem the certificate however, you’ve only earned $303.39.

• Using the above stated average penalty of 20% of the total ($1,611.84), your penalty would be $322.368.

But that would leave you with $9981.02 or a loss of only $18.81 (roughly 0.18%). And that’s if you redeemed it after only 12 months. You wouldn’t lose any principal if you held it for at least 2 years.

Even if the rate was 5%, you only be out about $55 after a year.

Don’t get me wrong, I never want to lose principal and I’m not comfortable throwing away money even if it’s less than 1%, but I wouldn’t lose sleep over it either.

Even if you bought a $100,000 5-year CD at 5% interest you’d only give up $600!

Bottom line – do the math, know the risk but don’t fret about the small stuff. I’ve wasted more money on a morning coffee through the years.

(all calculations were done using BankRate’s Certificate of Deposit Calculator.)

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I’m a CD Genius!

What’s your CD IQ?

I took this quiz at lunch a day or so ago, and I got the result of “Genius.”

Who knew?

It’s actually a pretty good quiz. It’s only 10 questions about certificates of deposit (CDs), but I really had to think on a couple of them and even had to guess once or twice. This sort of quiz is usually full of ridiculous answers, so it’s easy to guess right. But this one is different.

I just thought I’d share. Feel free to take the quiz yourself – and report back how you did!

Related Posts:

• What kind of Spender Are You?
• CD Penalty For Early Withdrawal Can Be Costly! (Really?)
• High Yield CDs (FDIC Insured) For March, 2010.
• CD Rate Roundup – Best Bank CD Rates in May

High Yield CDs (FDIC Insured) For March, 2010.

All the banks or credit unions offering these CDs have at least a 3 star rating from BankRate.com, which means it is at least average in it’s “safe and Sound”® rating. Here’s the full rating system:

Safe & Sound® rating system

1 Month CDs

3 Month CDs

6 Month CDs

9 Month CDs

12 Month CDs

5-Year CDs

Some observations…

Obviously, you’re going to earn more interest the longer you lock your money up but It’s interesting to see that the difference between 6 and 9 month CDs is negligible – and in the case of Ally Bank’s 6 month CD, you actually earn more than other 9 month CDs!

Also, some names appear multiple times. Ally Bank, for instance, is consistently on the high yield list, while other banks appear at different ends of the maturation spectrum. It makes me wonder how they can afford to offer high yielding CDs in all these maturity levels. I could see where Allstate Bank for example can offer high yields on short maturities, and either make the money up on their longer maturity offerings, or just by other long term investments they hold.

And lastly, it’s obviously not a savers market out there. This should come as no surprise, since the federal funds rate (the rate that banks are charged for the money) is virtually nil. The incentive is to borrow and spend, not save. This will turn around some day, which is the major reason not to tie your money up in long term CDs.

Source: Bankrate.com

Bank and thrift deposits are insured by the Federal Deposit Insurance Corp. Credit union deposits are insured by the National Credit Union Administration. Bankrate.com rates banks, thrifts and credit unions through proprietary Safe & Sound star rating system. Rates are subject to change without notice and may vary from branch to branch.

Related Posts:

• How to Find the Best Place To Put Your Savings.
• Best High Yield Savings Account Rates Of 2011.
• America Saves Week 2011 Is Here!
• Where Should You Keep Your Emergency Fund?
• CD Rate Roundup – Best Bank CD Rates in May

CD Rate Roundup – Best Bank CD Rates in May

Emergency savings accounts are all the rage these days, and while many people keep theirs in a high yield saving account, others use CDs. It all depends on when you might need the cash.

You may want to consider splitting up your savings, depending on your situation. For example, you may only keep a months expenses in a high yield savings account, and put the bulk of the remainder in a CD. This is especially attractive given the low interest rates these days, since CDs usually offer a higher rate of return.

Well, it’s something I’ve been thinking of doing, and I since I’ve been doing the research I thought I’d compile the list and share it with you.

These are the best cd rates for deposits of $10,000 and under, as rated by BankRate.com. I filtered out the worst and here’s the 2 and 3 star (out of 3 stars) ratings that remain.

Term
Institution
Rate
APR
Min
Deposit









1 month














Univest National
Bank & Trust Co.
Souderton, PA
 0.75
0.75
 $2,500











E-LOAN 

Pleasanton, CA
0.55
0.55
 $10,000










Citizens Trust Bank

 Atlanta, GA
0.20
0.20
$500









3 month







Ally Bank 

Midvale, UT
1.73
1.75
$0



Excel National Bank 

Beverly Hills, CA
1.73
1.74
 $10,000



NOVA Bank 

Philadelphia, PA
1.29
1.30
$500



Discover Bank 

New Castle, DE
1.25
1.25
 $2,500









6 month







Ally Bank

 Midvale, UT
2.13
2.15
$0



Excel National Bank 

Beverly Hills, CA
1.98
2.00
 $10,000



giantbank.com

 Ft. Lauderdale, FL
1.89
1.91
$2,500









1 year







Ally Bank 

Midvale, UT
2.76
2.80
 $0



Pacific Mercantile 

Bank Costa Mesa, CA
2.35
2.38
$10,000



Discover Bank 

New Castle, DE
2.33
 2.35
$2,500




Advanta Bank Corp.

 Salt Lake City, UT
2.27
2.30
 $10,000









3 year







Ally Bank

 Midvale, UT
3.15
3.20
 $0



Frontier State Bank 

Oklahoma City, OK
2.73
2.75
$10,000



Discover Bank 

New Castle, DE
3.16
3.20
 $2,500



Intervest National 

Bank New York, NY
3.05
3.10
 $2,500









5 year







Ally Bank

 Midvale, UT
3.44
 3.50
 $0



Frontier State Bank 

Oklahoma City, OK
3.21
3.25
 $10,000



Advanta Bank Corp. 

Salt Lake City, UT
3.25
3.30
$10,000



Nationwide Bank 

Columbus, OH
3.25
3.30
$500

Related Posts:

• High Yield CDs (FDIC Insured) For March, 2010.
• Best High Yield Savings Account Rates Of 2011.
• Which is Larger: Your Credit Card Debt or Your Savings Account?
• America Saves Week 2011 Is Here!
• Where Should You Keep Your Emergency Fund?