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Know CD penalty before signing up

By Claes Bell · Bankrate.com
Monday, March 26, 2012
Posted: 5 pm ET

Bankrate's most recent study of CD early withdrawal penalties shows they haven't changed that much since the last study in February 2010. A slightly higher number of banks will dig into principal to pay penalties, and the most common penalty remains three months' interest.

But one thing I want to highlight is the extreme disparity we found between different banks when it came to the penalties.

Penalties varied widely. For closing a one-year CD early, some institutions, including Bank of the West and Boeing Employees Credit Union, charged a penalty of only 30 days' interest.

On the other end of the scale, some institutions, such as Bank of America and JPMorgan Chase & Co., charged as much as $25 in cash plus 3 percent of principal.

Under the above two pricing schemes, if a consumer closes an entire $10,000 one-year CD, it amounts to a difference in penalty of $1.60 versus $325.

That's a huge disparity, particularly when you consider the fact that the $10,000 CD on average would earn you a grand total of $35 in interest right now at the current average one-year CD rate of 0.34 percent.

The fact that CDs are FDIC-insured can lull us into thinking they're only differentiated by their interest rate, but that's not always the case. Differences that you'll only see elaborated in the very fine print can come into play in a big way, as you can see in the example above. Other products can bear the name of "CD" and include all kinds of quirks, including fees and derivatives, in the case of structured CDs.

So before you commit to a CD, particularly when you're dealing with a substantial amount of money, be sure you've at least looked over the fine print and know what the penalty is, should you need to tap that money unexpectedly.

What do you think? Have you ever been burned by an early withdrawal penalty?

Follow me on Twitter: @ClaesBell.

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