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Low CD rates make penalties sting

By Claes Bell, CFA · Bankrate.com
Monday, September 26, 2011
Posted: 2 pm ET

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?

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1 Comment
Bobbi
October 17, 2011 at 2:31 pm

As long as interest rates are low people are unable to retire and open up jobs because there is no way that anyone can live on social security and tiny pension. When rates go up so people can get money on their money imo more people will be retiring. Not to mention that pension funds are also hurting from these low interest rates. JMO