Despite recent bank failures, banking is a highly competitive business. Store managers know their customers can easily walk across the street or click to another website to get a better deal. When prices go up, customers are even more likely to start shopping.
Many banks try to keep their customers by offering CDs that do not incur a penalty for early withdrawal (at least under certain conditions).
There is no truly penalty-free CD. FDIC guidelines require banks to charge a prepayment penalty if someone withdraws their money within the first six days of opening an account. This penalty equals seven days’ worth of interest.
After that, banks, although almost all of them, no longer have to charge a penalty – often between six months and a year of interest. Banks do this to manage their own assets and liabilities. When bank executives know the money will be there for a while, they can invest it in assets that will generate a higher return. Because of this, CDs generally pay higher interest rates than other types of savings accounts.
Occasionally, the FDIC asks its member banks to waive additional penalties, which they did in the early days of the COVID pandemic. Since the only penalty imposed by law is the withdrawal penalty for the first six days, banks have leeway to change or abolish the penalties.
However, in an environment of rising interest rates, banks know that the penalties discourage people from committing to CD. Here’s what you need to know when considering a CD without penalty.
What is a CD without penalty?
A No Penalty CD is a CD where you are not charged any fees for an early withdrawal under pre-determined conditions. As with any CD, there is an interest rate, term, and minimum deposit requirement, as well as FDIC or NCUA insurance for balances up to $250,000.
You can usually withdraw money early from a toll-free CD, but with certain limitations. Often you will have to exchange the CD for a CD and pay a higher interest rate at the same bank, but not always. It is important to inquire about the terms of the penalty waiver before opening an account as different banks have different policies.
Banks are offering CDs with no penalty to lure customers who fear holding onto their money as interest rates rise. Giving clients access to funds can be a competitive advantage.
High-yield savings accounts are another option that doesn’t incur a penalty for withdrawing money. They also currently offer competitive rates, up to 5% in some cases.
How does a CD without penalty work?
A CD with no penalty works like any other CD, except that you can withdraw your money before the term expires without forfeiting interest. In many cases, the interest rate is lower than with a traditional CD.
However, the exact conditions under which you will not be penalized can vary widely. For example, you may have a window every few months when you can withdraw your money without being penalized. Or you may need to switch your money to a higher return CD at the same facility. In some cases, you can actually withdraw your money at any time after the first seven days without penalty.
Since different banks have different withdrawal policies for their no-penalty CDs, it is important to compare these as well as the rates and terms available. A no-penalty CD may be limited to smaller deposits or to customers who have other accounts with the bank. For CDs with a maturity of less than a year, many CDs are available without penalty, and they typically have lower interest rates than other CDs.
How to choose the right CD for you
To choose a CD, you need to know your time horizon and how it compares to current CD rates. CDs are best for people who want security and relatively high returns. In return, they are willing to lock up their funds for a period of time.
In times of very low interest rates, a no-penalty CD is a good choice because you can transfer your money when interest rates rise. If interest rates are high, it may be better to open a traditional CD to secure the return, or consider other options for your money.
Editorial Disclosure: All articles are created by editors and contributors. The opinions expressed therein are solely those of the editors and have not been reviewed or approved by any advertiser. The information presented in this article, including tariffs and fees, is correct at the time of publication. Check the lender’s website for the latest information.
This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as the finance and home services editor for Hearst’s e-commerce team. Email her at lauren.williamson@hearst.com.
Post a Comment