2 Reasons to Check Your CD’s Fine Print


NEW YORK (MainStreet) – When it comes to certificates of deposit, we all know the deal: The bank gets to hold your money for the agreed-upon term, and in return it pays out interest. If you decide you need to pull out your money before the term is up, the bank will penalize you by a set amount– usually six-months’ worth of interest for a five-year CD.

Ken Tumin of DepositAccounts.com passes along an important tip to anyone planning to invest in a long-term CD and then take the early withdrawal penalty if interest rates start to rise quickly. He notes that some banks actually include language in their deposit agreements that give them the right to refuse a customer’s withdrawal request. So even if you’re willing to surrender some of the interest your money has earned, your bank may keep your cash under lock and key until the term is finished.

And it’s not just a few sneaky banks here and there. Tumin estimates that a quarter of banks have a provision in their fine print that allows them to refuse an early withdrawal request, though they rarely exercise that right. Among the big banks, he points to U.S. Bank (Stock Quote: USB) in particular, which includes in its deposit agreement the provision that “Except as required by law, withdrawal prior to maturity will be permitted only with the consent of the bank which may only be given at the time of withdrawal.”

So, should consumers be concerned? Well, the general consensus is that interest rates are going to start climbing again as the economy recovers, so those locked in long-term CDs at relatively low rates might be interested in pulling out of their agreement to grab a better rate. If too many consumers start to exercise that option, though, banks might look at their dwindling liquidity and decide they need to exercise this option to keep the coffers full.

But most economists seem to think that deposit rates will climb slowly in comparison to lending rates, so most consumers will be content to let their CDs mature as planned. As long your bank isn’t facing some liquidity issue on another front – for instance, because a lot of customers defaulted on loans – it will probably be happy to impose an early withdrawal penalty and let you go free.

Tumin also suggests CD owners check for another unexpected piece of fine print in their agreement. A few banks include a stipulation that allows them to change the early withdrawal penalty mid-contract. Much as AT&T (Stock Quote: T) hiked its early termination fees when it realized a lot of customers might leave for Verizon, so too could banks make it more painful for consumers to break their contract if they see interest rates start to rise precipitously.

Both options are relatively rare, but before you hand over a chunk of your nest egg, make sure you know what you’re getting into.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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