Read the fine print
Because of the variety of early withdrawal fees mandated by different banks and credit unions, it's important to read the fine print.
McBride says that before investing in a CD, the investor needs to check:
- Exactly what the early withdrawal penalty is.
- Whether the penalty applies only to the amount withdrawn or to the entire amount of the CD.
- Whether the principal investment is at risk if the interest earnings do not cover the penalty.
- How long is the grace period, if you accidentally let a CD automatically roll over.
"Investors should know the specifics of the CD early withdrawal penalty before investing, just in case they incur a need to withdraw funds early," McBride says. He says banks in this year's survey typically allow a grace period of seven or 10 days on automatically renewing CDs without incurring a penalty.
Stiff penalties on even low-yielding CDs
Don't just assume that a CD with lower yields will have lighter penalties if you take out money early, McBride says. In fact, some of the most onerous penalties found in the survey are on lower yield offerings.
For instance, Capital One has a two-year CD that yields just 0.2 percent, but it charges $25 and 3 percent of the amount withdrawn as an early withdrawal penalty. In contrast, East Boston Savings Bank's two-year CD offers a yield of 0.7 percent, but it has an early withdrawal penalty of only three months' interest.
McBride says banks with larger market share tend to be less competitive on yield, "and we see some overlap between that and more onerous penalties."
Consider your options
Consumers may have been fairly tolerant of early withdrawal penalties when yields were high, but Geller says CDs have become less favorable investments with low yields since the recession.
"They've lost their appeal, even with the segment that used to cherish this savings vehicle," Geller says. A slightly better yield than other conservative investments may not be worth it for consumers who can't lock up their money for a specific amount of time, he says.
Still, CDs can be good for some consumers, Geller says.
He says liquid CDs are one option available to avoid CD early withdrawal penalties, if a consumer decides to jump ship early on a CD. Liquid CDs allow investors to take money out of their accounts without incurring a fine. However, liquid CDs tend to offer lower yields than a more traditional CD.
Cummings says he counsels consumers to stay away from liquid CDs and other CDs with lots of bells and whistles. He says the best thing that consumers can do is plan ahead and not lock up any money in a CD that they may need before it matures.
"I encourage people to think," Cummings says.