Bank Offers Higher Rates For “No Early Withdrawal” CDs – Worthwhile Benefit?

by Ken Tumin

Unlike most of what I post, these CDs aren’t noteworthy for the high rates. They’re noteworthy because of an option that the bank is offering. Texas Exchange Bank is offering higher rates if customers choose the “No Early Withdrawal” option for its CDs. The bank is advertising this option on itswebsite as of 11/06/2012. This is the first time I have seen a bank or credit union give this option.

Most of the time, banks and credit unions bury the early withdrawal policies in the account disclosures. Most banks and credit unions allow an early withdrawal with a penalty. However, several institutions have language in their disclosures that suggest that an early withdrawal can be disallowed. Ally Bank recently added language to its disclosure giving them this right.

With many banks being sneaky with their CD early withdrawal policies, it is nice to see a bank being upfront with its policy. However, this brings up some important questions. How much is the early withdrawal option worth? For the case of Texas Exchange Bank, choosing the “No Early Withdrawal” option will result in CD rates that are 20 basis points higher. For example, the 5-year CD APY goes up from 1.40% to 1.60%, and the 30-month CD APY goes up from 1.10% to 1.30% (as of 11/06/2012). For this case, I don’t think the higher rates are worth it. The “no early withdrawal” option is more appealing for shorter terms since there’s less chance we’ll see big changes in the rate environment. Another thing to consider is the size of the early withdrawal penalty with the “early withdrawal” option. That isn’t clearly disclosed by Texas Exchange Bank. The appeal of an early withdrawal is diminished with larger early withdrawal penalties.

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