CD investing traps

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CDs seem like the most basic of investments, but they can still trip up unwary investors. And no wonder, not every CD is a straightforward investment. They can come with confusing terminology and sometimes long prospectuses.

In a short trip to the bank, investors can unwittingly lock themselves into CD mistakes.  

But, those sticky mix-ups are easy to avoid when you know what to look for.

The Securities and Exchange Commission advises investors to double check the maturity of the CDs they are planning to buy.

 It’s recommended that you get the CD maturity date in writing before forking over your money.

It’s easy to be dazzled by a high yield and not realize you’re signing up for a ten-year commitment.

Similarly, some investors may be thrown off by the call period. A one-year noncallable CD doesn’t mature in one year; it won’t be called for one year.

Know the interest rate you’ll receive and how you’ll be paid. Is the rate fixed or variable? It seems obvious, but there have been instances in which investors roll over a CD and don’t verify their interest rate. Particularly in today’s rate environment, that can lead to a big disappointment.

Investors should also understand the early withdrawal penalties. The Bankrate 2010 CD early withdrawal penalty study found that the average penalty for maturities of less than one year is equal to 90 days of interest. For maturities of more than one year, the average penalty is 180 days of interest.

But withdrawal penalties can exceed the averages. At Chase, for example, if you want to cash out your $25,000 CD, it will cost you $25 and 3 percent of the withdrawal — quite a bite. Know what you’re getting into ahead of time.

To start searching for the right CD for you, visit Bankrate’s CD rate tables.

Have you bought the wrong CD or realized too late your CD maturity was much longer than you thought? Fess up in the comments.