Warning: Banks Automatically Renew CDs Upon Maturity, 7-Day Grace Periods

It’s hard to believe that back in August 2008, I was able to get a 5% APY 12-month CD from Washington Mutual (now Chase). Since it’s almost time, I called today to see if I could designate how I wanted the funds to be disbursed upon maturity. However, I was told that I actually had to wait until the actual maturity date, and then call them within a 7 day grace period. If missed that short window, then it would automatically renew into another CD of the same term, and I’d be subject to early withdrawal penalties. (Up to 6-months of interest, which can mean you get back less than your initial principal.)

After a bit of research, it seems that many of the big banks do this. For example, with Bank of America, for CD account terms that are 7-27 days, there is a 1 calendar day grace period. For CD account terms that are 28 or more days, there is a 7 calendar day grace period. Yes, one calendar day, not business day, so if it’s a Sunday or holiday you still have to contact them? I’ve also read that some banks require you to physically enter a branch or send a snail-mail letter.

On the other hand, other places that I’ve dealt with, like Pentagon Federal Credit Union, allow you to choose how the CD should be treated right when you open it. I can have the CD renew, have the funds transferred to a PenFed checking account, or have it sent to me by check. I can even choose to either reinvest the dividends or have them sent to me monthly. I guess this is another example of credit unions often being more consumer-friendly.

Meanwhile, I guess I’ll just have to set up some Google Calendar alerts to text me repeatedly when this thing matures. The current traditional CD is paying only 0.25% APY, and the online CD is 1.25%.

You can keep up with where I’m putting my cash here.

Comments

  1. Is the early withdrawal penalty on the auto-renewed CD just lost interest? Therefore if you call on the 8th day, you lose 8 days of interest and it’s as if they have held your money in a no-interest checking account waiting for your further instructions?

  2. It depends on the bank. They seem to be especially secretive about it, I can’t find it right now in WaMu’s fee schedule online. For longer CDs is it often 3-months or 6-months of interest, which can easily eat into your original principal.

    So, maybe these piddly rates are good for something… small penalties! Though I guess everything counts these days.

  3. From Bank of America Online Chat:

    Terms 90 days or less will forfeit one month of interest
    Terms 91 days to one year will forfeit three month of interest
    Terms more than one year will forfeit six month of interest

  4. What I meant was is it *up to* one/three/six months of interest? If you haven’t earned the interest, does the penalty really eat into your principal?

  5. TFB — yes
    its not up to what you have accrued, its 1/3/6 months of interest.

    maybe if it accidentally renews, you can get them to switch you from the 1.25% interest rate to the .25% interest rate, that way your fee would be even less

  6. Nuri – Thanks. It’s lame big banks set traps like that. I’ve never bought CDs from a bank.

  7. Wamu tried to pull this on me in the past, but I was able to get them to pre-allocate the eventual funds by going into a branch and refusing to take no for an answer. Of course, that was before they were Chase.

  8. mapgirl says:

    Jonathan,

    LOL. Silly you. You need a private client banker service. THEY call YOU when the CD is expiring. They tell you the new rate and ask if you want to continue the CD or not.

    I worked for a very wealthy woman once. Her bankers would regularly call her about maturing CD’s. Since my job was to partially screen her calls, I found out this is the way rich people live.

  9. Evil banks make it so hard for customers to end their CDs.

  10. Fortunately online banks let all of us be like rich people. They e-mail us when the CD is expiring and let us tell them online what we want to happen with our money.

  11. The key point that has NOT been clarified here is that (under contract law principles?) the early withdrawal penalty from the automatically renewed CD would only cut into accrued interest from the automatically renewed CD, which has new terms and conditions (most critically, a new interest rate) that are distinct from the original CD. If this were true, then the question of whether there is a small (even 1-day) window of time becomes nominal.

  12. Steve H says:

    I just had the exact situation happen to me. (I bought my 5% CDs based on your blog comment). I was told when the accounts move over to chase in October (california accounts) these CDs services will be available. Hmmmm, we’ll see.

  13. Same thing with Wachovia. Earlier you could call them before CD matured and tell them not to renew it. Now they tell you that you can call only in the grace period.

    I asked them why they changed the rules. They said to enhance customer service.

  14. What I found also is that some banks will have special rates on certain terms to get new deposits. Then, when the CD matures, the “special” is on a different term, and the renewal rate for the previous term is particularly low. For example, they would have a special on an 11-month CD. They tell you it would automatically renew to another 11-month at maturity. At the time of maturity, the 11-month CD has a terrible rate, but they have a special deal on a 10-month CD. Furthermore, as I recall, I had to come in person to change it. Clearly, it was a carefully designed trap. I agree, the online banks seem to be much more customer-friendly. I have CD’s at ING (still getting 4%) and Ally right now.

  15. Yep, this one happened to me. Oh, and I should mention they’ll give you the crappiest rate they have if it ‘auto renews’. I still saved money by breaking it.

    I used the contents to pay off my car, and put the remainder into a CD that was several points higher.

  16. I was impressed with ING in the past when their rates were still competitive. If I remember correctly they allow you to designate what happens at maturity any time during the life of the CD.

  17. The Gooroo says:

    I’ve seen this happen to quite a few of my friends parents — they obviously weren’t happy at all. It seems like not all banks do this though.

  18. seems like the only logical thing for them to do. How are they supposed to know that u want the money to be transferred back to ur savings or checking?

    WAMU forfeits interest gained, so if u have a 10K cd and it renews to 0.25% thats $20 a month of interest. I dont think they forfeit interest yet to be gained. Thats what they told me the last time. Not 100% sure.

  19. From the Chase disclosures pdf located at linkified
    “Early withdrawal penalties may require a reduction in the principal amount if the amount of accrued and unpaid interest on the deposit is less than the penalty.”

    I have never seen this before, but it’s been years since I’ve owned a CD. It used to always be a penalty never to exceed the interest paid/accrued.

  20. I’ve only had CDs with ING, but they were quite clear about what the value of my CD would be at maturity and what the early redemption value would be, and the early redemption value was less than my original principle. It was definitely minus not only accrued interest but interest yet to be gained.

  21. 1) I used to open more than 10 CDs with Citibank in 2-month period. I could not close them online. I had to go to their branch each time a CD matured. I asked their rep why and she explained, we would not let your money go out easily.

    2) One calendar day grace period may impose serious problem. I think Congress should have included this issue in their credit card reform bill :-)

    3) Last Nov when my CDs at INGDirect matured, I withdrawed the CD into my saving account. I could do that online when I placed the withdrawal request at least one day before the maturity day. When I did it on the same day, INGDirect website had automatically locked and renewed my CD. I had to call them, unlocked/close the CD and transferred the money into saving.

  22. This isn’t a whine about feeling ignored, but this discussion has not yet touched on what seems to me the central issue; I wrote above, “The key point that has NOT been clarified here is that (under contract law principles?) the early withdrawal penalty from the automatically renewed CD would only cut into accrued interest from the automatically renewed CD, which has new terms and conditions (most critically, a new interest rate) that are distinct from the original CD. If this were true, then the question of whether there is a small (even 1-day) window of time becomes nominal.”

    Basically what I’m saying is that it would have taken some careful (if not anti-consumer) T&Cs writing for these banks to legally bind customers with new T&Cs (e.g., a new rate) yet apply an early withdrawal penalty based on the period that ran under the old T&Cs. This whole perceived dilemma might be smaller than everyone thinks IF the most to lose is the interest accrued after the bogus renewal — that would make me a lot less tense about a small window of time.

  23. I have never been part of a credit union, nor have I ever worked for a credit union. But I have worked for 3 regional and then 1 large national bank in the last 9 years (I won’t mention any names). The policies on CDs were very similar at all these banks. I can’t guarantee it’s the same thing at your bank, but it may very well be:

    - YES YOU CAN lose principal if you withdraw early. The penalty is calculated based on your interest rate x a certain number of months or days, but the penalty is NOT only subtracted from your accrued interest. Say you open a 12-month CD, and your penalty is 3 months of interest at a rate of 5%. This means your penalty is 1.25% of your principal (5% / 12 * 3). If you close the CD a week after you opened it, your penalty is still 1.25% and you will cut into your principal. If you close your CD 3 months after you opened it, you will get back your principal with no interest. Any time after the first 3 months, you will get back more than your original principal.

    - Now, say you open a 12-month CD with $10,000 principal at 5% with an early withdrawal penalty of 3 months. Your CD grows to $10,500 after 12 months. Now it automatically renews for the next 12 months, but the rates have dropped and now you’re getting 2%. After your auto-renewal, your penalty now is equal to 3 months of interest at the new rate of 2%, which is 0.5% of $10,500, which is about $52.50. If you close your CD 1 month after the auto-renewal, you have accrued about $17.50 of interest on your $10,500. So, you walk away with $10,500 PLUS accrued interest of $17.50 MINUS penalty of $52.50 = $10,465.

    When you open a CD account with a large bank, there are often a lot of options that the representative will not mention. If you don’t bring up your distribution options, they will just go ahead and open the basic CD that auto-renews at maturity and automatically reinvests interest into the CD. That’s the easiest thing FOR THEM. However, there are many options that may be available to you. ASK! If they say, “Um, I don’t think you can do that,” ask to speak with a manager to double check that what they’re telling you is correct. Some of these distribution options are rarely requested, and if the rep is new, they might not even know that some of these things are available at their bank.

    - A lot of banks will let you designate your maturity distribution options when you open the account. As in, you can say you want your whole CD to be transferred over into your checking account upon maturity. You have to tell them when you open the account (some will let you change this option mid-term). They usually WILL NOT ask you if this is something you want, but if you ask them, they will often have that option.

    - Various interest distribution options are a standard feature in the banking industry, not just at credit unions. If you do not want your monthly or quarterly interest to be added into the CD (and you don’t mind losing the effect of compounding interest!), then you should ask what other options you have for receiving your interest. They should be able to deposit your CD interest into your checking account at the same bank. This shouldn’t be anything out of the ordinary–a lot of people live off their regularly-distributed CD interest. They might be able to send you a check in the mail, though a lot of banks are trying to cut down or eliminate this option because it costs them a lot more than an electronic transfer into your checking. Again, the bank will not offer you this option unless you ask, because it means 1) more work for them (if filling out an extra form can be called “more work”), 2) they’ll have to tell you that you’ll earn less interest this way since it will not be compounded (so you’ll get the amount of interest equal to just the straight-up interest rate, and not the APY).

    - Even if you did not choose to have your CD interest to be regularly distributed every month or quarter, you should still be able to withdraw your CD interest at will. That’s right, you can walk into the bank and ask for your CD interest, and you should not be penalized for it. Again, I can’t guarantee that this is the case at your bank, but I have never worked at a bank where this was not practiced. That’s because your original contract locks up your principal only, not your interest. Say you put $100,000 into a 12-month CD at 4%. Then six months later you need a couple of grand. You come into the bank and ask to withdraw your CD interest. This is a rarely requested transaction, so if the rep is new, they will definitely look at you like you have two heads and will try to tell you that you can’t do that, but if you check with a supervisor, you should be able to get your interest.

    - Finally, never have I ever worked at a bank where they didn’t notify you by mail that your CD maturity date was coming up. Somebody above mentioned ING sends you an email. Well, if your bank does not send you an email OR mail you a letter when your CD is about to mature, there’s something wrong (with your mailing address, your mail carrier, or the bank). Most banks will send you a letter about 3 weeks ahead of the maturity date, and the letter should tell you your distribution options. Usually, there’ll be a place on the letter where you can tell them to close the CD and send you a check or deposit the CD proceeds into your checking account at that bank. You sign the form and send it bank to them. This is a good option if you want to close the CD but are afraid of missing the grace period (typically, a 7-day window after maturity) or plan to be out of town. Most large banks have moved away from allowing you to do this by phone because they want to document the transaction with your signature. It has nothing to do with “improving customer service” (what a joke!), it has to do with fraud–a VERY serious concern for banks today. But you should have the option of telling them what you want to do with your CD by mail.

    If you open your CD at a bank, and walk out of there not having a clear idea of exactly what will happen 1) if you withdraw early, 2) when your CD matures, then the customer service representative didn’t do their job. Period. They may have, however, handed you some papers. Read them. You’d be surprised how much you can find out by reading the terms and conditions to which you agreed.

  24. Joshua Katt says:

    Big Banks got to be Big Banks and stay Big Banks by various means of deliberate obfuscation as demonstrated above in gotchas, confusion and fees. Keep enough money with them and all these magically disappear. Sad commentary on how corporate entities environment has twisted the free market environment. Consumers can’t even vote with their dollars because of the wasted time trying to get to the Truth of every deal/transaction and have basically given up. I know I have…

  25. drdomore says:

    when my wamu CD was about to mature, I got a letter in mail from wamu telling me what my options were…so its not like they will renew without warning you!

  26. As low as rates are can you believe the government is paying up to 4% on 10,000.00? Now you know why everyone loves to do business with Uncle Sam. You can’t lose.

  27. drdomore says:

    @jay, how are you getting 4% from Uncle Sam?

  28. My 5% CD is up for renewal on 8/25/2009. I received a e-mail notice and a letter that stated the CD would auto renew unless I called Wamu / Chase to exercise another option. I called on 7/23 which is over a month before the maturity date and the telephone banker noted that I wanted the CD to close and instead of renewing automatically. He then asked what account i wanted the money transferred to when the CD matured and set up the transfer. So on the renewal date my CD should close and the money should transfer to my personal checking account.

    Perhaps you just talked to the wrong person or what you wanted was not clear? Or is this something that could vary state to state (like California has some rule requiring Wamu / Chase not to auto renew but others states allow)?

  29. R. Blaine says:

    Just to point out that some banks (usually smaller banks) do not pay accrued interest during the grace period if you are not renewing. In those instances you need to get the money out at maturity date, because your money isn’t earning anything. Also with a large amount, paying a wire fee is usually preferable to waiting for the check in the mail. With a local CD I always visit the branch.

  30. Follow-up on R. Blaine’s posting:

    Yes, that is right.

    Citibank pays its saving account interest rate each day the money stays there during the grace period. Some local banks (Valley National Bank and United Commercial Bank) do not pay any interest at all.

    Wire transfer may incurr double cost — $25 for send and $10-$20 for receive. Wamu charges $10 and Bank of America charges $25 for receive.

  31. I got burned by this some time ago with WAMU/Chase; their letter indicated the wrong date for the end of the grace period and later, I was just too lazy to do anything about it since the CD was for a relatively small amount. While in the branch, I went ahead and broke it and reallocated it to a longer-term, higher-interest CD. The penalty (since the new CD interest rate was so piddling) wasn’t very much, and the woman completing the transaction advised me that if you call the branch itself upon receiving that letter, you can leave instructions with the branch to make sure that the CD is cashed out, rolled over, or whatever you need.

    Her explanation was that the account notes aren’t necessarily going to be accessed while a call and notice given to the local branch directly means that someone is going to be personally responsible for making sure that the CD is dealt with per your instructions.

  32. I just got screwed by Wachovia as described in this post. I had a large CD for a year at a good rate (the bait) and then I was on vacation in Europe when the CD came due. The CD renewed at essentially 0% for a year, but when I got home and told them to send me a check, they took $250 out of the interest I had accrued in the previous CD.

    Now I see I’m not the only one, and I hate the banks, and I especially hate Wachovia (now Wells Fargo).

  33. Patrick,

    I hate Wachovia, too!

    Wachovia charges me dormant account fee without any prior notice. When I told to the branch manager, she insisted it is a valid charge.

    Then, I told her I am willing to pay the fee but I wanted to close my account. She did not allow me to do so. I have to wait for more than one week to go the branch again to close my accounts.

  34. This just happened to me. Can’t see if anyone has sued my bank yet, but I did find this at one law firm website (WebbLLC.com):

    Certificate of Deposit Practices (United States District Court) – Some banks have adopted bad faith practices in regard to their automatically renewing certificates of deposit (CDs). These practices result in customers – who are often elderly – having their interest rates reset at far below market rates, sometimes for years. Moreover, if customers request to withdraw their funds they are subject to sizable penalties that bear no relationship to the bank’s actual costs. We are currently pursuing a class action lawsuit regarding these practices.

  35. Bank of America is the worst of all. They do not want people taking money out of their bank and going somewhere else for higher interest rate. I have been doing business with them for over 15 years now I am going to close all my accounts with them and go somewhere else. These guys are their to rob you.
    BE CAREFUL OF BANK OF AMERICA. THEY SCREW YOU.

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  1. [...] Warning: Banks Automatically Renew CDs Upon Maturity, 7-Day Grace Periods [...]

  2. Selection Bias, The Wanting Mind, Bank CDs, and Socially Responsible Investing - The Finance Buff says:

    [...] Warning: Banks Automatically Renew CDs Upon Maturity, 7-Day Grace Periods at My Money Blog – Jonathan found out that many banks auto-renew CDs to very low rates when the CDs mature. If you missed the grace period, the early withdrawal penalty can eat into what you earned in the previous term. What a nice trap! [...]

  3. [...] first heard this from Jonathan at My Money Blog about two years ago. Many banks automatically renew matured CDs to the same term. You only have a [...]

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