Banking Blog

Finance Blogs » Banking Blog » Greg McBride: Don’t touch that CD!
Greg McBride

Greg McBride: Don’t touch that CD!

By Greg McBride · Bankrate.com
Tuesday, January 5, 2016
Posted: 6 am ET

Think twice before cashing in a CD early. The penalty may hit harder than you expect.

Now that the Federal Reserve has put interest rates into liftoff, many investors who have been stuck in low-yielding certificates of deposit may be thinking of heading for the exits early in hopes of shifting that money into CDs with better returns.

But hold on. For starters, interest rates are likely to move up gradually, and many banks will increase their deposit payouts at an even slower pace.

And then there is the early withdrawal penalty to consider.

the-common-costs-of-early-withdrawals-3

Penalties can really sting

On short-term CDs, expect to give up 3 months of interest. With longer maturities, you'll lose 6 months to 1 year of interest. And those are just the common penalties. On some 1-year CDs, you can be charged as much as 2.5% of your total principal, or 4% of the amount you're withdrawing.

A Bankrate survey found that in nearly 90% of cases, if your total interest earnings aren’t enough to satisfy the early withdrawal penalty, the bank will confiscate some of your principal.

This is a major deterrent for taking money out of CDs early, as the whole reason investors choose CDs in the first place is to protect their principal. The prospect of losing some of that cash should give savers a reason to think twice.

 

«
»
Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.