CD rates have lately fallen to levels so low they're giving CD investors sticker shock. The average yield now on a 1-year CD is now .39 percent, which will earn you a whopping $39 on a $10,000 CD. Rates that low undeniably hurt savers, but they also have a way of magnifying the pain of excessive CD fees, especially those for early withdrawals.
Last week a Chicago Tribune reader wrote personal finance columnist Gail MarksJarvis complaining about a 13-month CD with a yield of .2 percent charging a whopping 3 percent of principal for an early withdrawal.
Here was her response:
This is outrageous, and here is the warning: If there is any chance that you will need to pull your money out of a CD early, make sure you understand clearly what the penalty will be. And if you are going to renew a CD, make sure you don't do it without reviewing the terms.
We all get busy, and sometimes it seems easier just to let a CD go on autopilot when a due date arrives. But as you point out, that can cost you dearly.
I think MarksJarvis is right on the money here. Everything in this story points to this CD as a real lemon. Not only did it have a yield that was way below-market -- .2 percent is even lower than our average, and right now there are 1-year CDs yielding over 1 percent in our survey -- but it had a early-withdrawal penalty that's above-market.
For a $10,000 CD, that would mean a potential payoff of $20 against an early withdrawal penalty of $300. Bankrate's 2010 CD early withdrawal penalty study showed a typical early withdrawal penalty for a CD of a year or more would be 180 days worth of interest, or in this case, about $10.
It's possible banks have changed the way they compute penalties to reflect today's poor rates, but I think the problem was more about this being a particularly bad CD. There are always going to be banks offering bad deals on CDs, but that doesn't mean you have to take them. Especially if you're dealing with a large amount of money, it pays to do due diligence on a CD and the fees and conditions that come along with it.
Every CD comes with a list of terms and conditions that will clearly spell out what the early withdrawal penalty is, and many times that disclosure is available both as a paper document and digitally on the Web.
What do you think? Where does the responsibility lie on a CD snafu like this?