|Bank of America alert: Beware of automatic CD renewals and severe early withdrawal penalties|
Are you keeping close track of your Certificate of Deposit's renewal interest rates and the rules your bank applies for early withdrawal? I thought I was doing well enough, but some of my assumptions proved to be far from the truth, at least in the case of Bank of America.
My favorable experiences with CD's over many years at reputable banks had lulled me into what has proven to be a false sense of confidence. I had "learned" that, having picked a good bank with a competitive interest rate, one could trust the bank to renew the CD at a similarly competitive rate. Bank of America has proven me wrong. Furthermore, I had assumed that "Substantial penalty for early withdrawal" would have some degree of reasonableness attached, and that competition among banks would lead to semi-uniform policies. Wrong again.
The initial problem was that my 2-year CD at Bank of America automatically renewed at ~0.35% APR. That's about 2-4x below the current best rates. So, about 7 days after it renewed, when I received notice of this, I decided to roll it over to another institution. Bank of America did not mention their surrender fee (and I didn't think it was likely to be a problem 7 days after renewal). When I spoke with Fidelity Investments, the representative cautioned me to find out what the early withdrawal penalty would be. Thank you, Fidelity! It turned out to be 3% of the balance, or ~10 years' worth of interest! In this case, after I protested, Bank of America permitted me to change to an 18 month CD at 0.7%, so the actual cost of my bad assumptions was not as bad as it might have been.
However, it's definitely buyer beware, even for something as mundane, competitive, and carefully regulated as a CD. I nearly fell into a trap involving what I would consider very non-competitive rates and/or exorbitant fees. There are probably other cases where such pitfalls exist, so be alert. Choosing a financial institution with a long-time, generally good reputation is not sufficient to ensure that your money is well-invested.
Just for my own information, I looked on the Internet to find out what was public knowledge about the B of A withdrawal penalties. Two interesting items. One is a new B of A product that has no withdrawal penalty after 6 days. This product has an interest rate in the range that B of A first offered me, but seems to apply to only certain new CD's. The second is a Los Angeles Times article by David Lazarus that specifically refers to the new, higher early withdrawal penalties being charged by B of A. Very interesting.