90% of Financial Institutions Will Dip Into Principal for Early CD Withdrawal Penalties Amount and Timing of Early Withdrawal Are Factors in Determining Penalty
NEW YORK, June 30, 2014 /PRNewswire/ -- Nine in 10 financial institutions will confiscate some of the principal if a customer makes an early withdrawal from a certificate of deposit and the accrued interest is less than the required penalty, according to a new Bankrate.com (NYSE: RATE) report.
The most common penalties are three months' interest for CDs with maturities of less than one year and six months' interest for CDs with maturities between one and five years. For a 5-year CD, the most common penalty is a tie between six months' interest and 12 months' interest. That is a change from 2012, when Bankrate.com last conducted this survey and the most common penalty was six months' interest.
Bankrate.com chief financial analyst Greg McBride, CFA says investors need to be certain they can live without the money for the required amount of time before opening a CD that carries an early withdrawal penalty. Alternatives are a shorter maturity or a CD that contains a liquid or no penalty feature, provided the customer is not surrendering too much yield for that flexibility.
"Investors look to CDs more for a return OF their money than a return ON their money, and early withdrawal penalties threaten the return of the investment they're trying to protect," McBride adds. Early withdrawal penalties vary, with an even split between the penalty applying only to the amount withdrawn or to the entire amount of the CD regardless of how much is withdrawn.
The penalty terms are the same whether the CD is held on a taxable basis or in an IRA. The steepest penalties are more likely to be on lower-yielding offerings, especially for CDs that mature in fewer than five years. The grace period on automatically renewable CDs is either seven or 10 days, depending on the account.
The full early CD withdrawal penalty survey results are available here:
Bankrate.com surveyed the top 10 banks and thrifts in the 10 largest U.S. markets, plus the five largest credit unions nationally (by deposits), from May 5-14, 2014. The survey measured early withdrawal penalty policies on 3-month, 6-month, 1-year, 2-year and 5-year CDs.
About Bankrate, Inc.
Bankrate is a leading publisher, aggregator, and distributor of personal finance content on the Internet. Bankrate provides consumers with proprietary, fully researched, comprehensive, independent and objective personal finance editorial content across multiple vertical categories including mortgages, deposits, insurance, credit cards, and other categories, such as retirement, automobile loans, and taxes. The Bankrate network includes Bankrate.com, our flagship website, and other owned and operated personal finance websites, including CreditCards.com, Interest.com, Bankaholic.com, Mortgage-calc.com, CreditCardGuide.com, Nationwide Card Services, InsuranceQuotes.com, CarInsuranceQuotes.com, InsureMe, Bankrate.com.cn, CreditCards.ca, NetQuote.com, and CD.com. Bankrate aggregates rate information from over 4,800 institutions on more than 300 financial products. With coverage of nearly 600 local markets in all 50 U.S. states, Bankrate generates over 172,000 distinct rate tables capturing on average over three million pieces of information daily. Bankrate develops and provides web services to over 80 co-branded websites with online partners, including some of the most trusted and frequently visited personal finance sites on the Internet such as Yahoo!, AOL, CNBC, and Bloomberg. In addition, Bankrate licenses editorial content to over 500 newspapers on a daily basis including The Wall Street Journal, USA Today, The New York Times, The Los Angeles Times, and The Boston Globe.
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SOURCE Bankrate, Inc.