CD early withdrawal penalties survey
|By Laura Bruce
Many people judge a certificate of
deposit only by the interest it pays. But research by Bankrate.com shows that
paying attention to the early withdrawal penalty on a CD is essential, too.
vary widely and cashing out prematurely can cost you part or all of the interest
earned -- and even part of your principal, the research shows.
100 institutions -- the top five banks and the top five thrifts,
by deposit size, in the nation's 10 largest metropolitan markets.
Data was gathered on each institution's minimum deposit requirement,
yield and the early
withdrawal penalty for five CD maturities ranging from three
months to five years.
Here's what Bankrate found:
|CD survey highlights
The survey found that penalties vary
widely within markets and within certain maturities. Some institutions are far
less tolerant of cashing out before maturity and try to discourage the practice
with penalties that appear onerous compared to the competition.
early withdrawal penalties vary
Why the big differences? Financial
institutions vary their CD terms, including penalties, for several reasons. Most
commonly, banks use CD deposits to fund their financial needs for things such
as loans. An institution that expects higher loan demand at certain times of the
year may price CDs accordingly so that a specific maturity looks far better to
customers than other CD offerings.
With penalties, banks are
also making an assessment of their future cash needs in light of where interest
rates may be down the road. If there's too little penalty for early withdrawal,
and rates suddenly spike, customers will pull their cash out and buy new CDs at
"Penalty structure can depend to some extent on the
shape of the yield curve," says Bert Ely of Ely & Co., an independent
banking consultant. In CD terms, the yield curve is a graphical
description of the relationship between rates and the length of
the CD. Usually, the longer the term, the higher the rate. "In part,
banks may shape their penalties not so much on what the yield curve
is today but where they think it's going. Interest rates have squeezed
margins and this may make them more sensitive to people cashing
out early. They may be thinking that some people will cash out and
buy higher rates if the penalty isn't too severe."
If you're hunting for CDs, the penalties have to be
considered. Suppose you purchased a five-year CD three years ago
when interest rates were very low; is it worthwhile to take the
early withdrawal hit and use the proceeds to buy a new CD at today's
That will take some analysis on your part, but it's definitely worth
Customers who shop around and are flexible as far
as maturity can work that to their advantage even though it may mean buying CDs
at banks other than their own. Nevertheless, if there's a stringent penalty attached,
be sure you can do without the money for the length of the term.
that eat into principal
The worst penalties leave you with less money
than you had when you invested.