Clark Howard

What To Do BEFORE Your CD Expires

If you’ve ever gone to buy a CD, you may have noticed some listed as single-term CDs and others listed as rollover or auto-renew CDs.

That may seem like a small detail. But it can sting and surprise you if you aren’t aware of the difference.

A bank returns all your money plus interest to a designated account at the end of a single-term CD. With a rollover CD, you get a grace period at the end of the term. And if you don't proactively withdraw or move your money, the bank automatically renews your CD and begins another term.

Unfortunately, rollover CDs can cause confusion. They also sometimes give underhanded banks a way to extract more dollars from you.

What Is a CD?

A Certificate of Deposit [CD] offers fixed income. When you open the CD, you're promising the bank you won't withdraw for a specific period, or "term." In return, the bank or financial institution offers you a slightly higher fixed rate of interest than what you'd get from that same institution via a savings account.

The bank then knows it can lend out and make interest on your dollars. And it knows how long it’ll be able to lend out those dollars.

If you withdraw the money before the agreed-upon term ends you’ll pay an early withdrawal penalty and forfeit some of your interest earnings. That penalty for withdrawing early includes if you allowed your funds to roll over into a new term.

Your CD may be set up for auto-renewal. It’s important to know whether this is the case before you lock into a CD.

Consider whether you will need access to those funds and when. Remember, CDs are illiquid during the term. The financial institution is counting on you not taking back those funds during your term in exchange for a premium on your interest rate. The grace period window gives you a chance to be intentional before your CD autorenews. What if you still want your money in a CD, but at a different term? And what if you can get a much better rate from another institution?

Not all CDs are rollover CDs. Single-term CDs don’t automatically renew when the term ends. Instead, the bank typically transfers your money to a designated account such as your savings account when the term ends.

Many banks offer automatic rollover and single-term CDs. That can be confusing for a layperson who has never bought a CD before. But it allows you to choose the option that fits you best.

What Do I Do With a Rollover CD When It Matures?

Remember, with a rollover CD, the bank will take your money and the interest you’ve earned at the end of the term and start a new term.

However, during the grace period, you’ve got choices. Rollover CDs typically offer grace periods of seven to 10 days. If you miss that window, your financial institution can:

  1. Auto-renew your CD into a new term. Perhaps even at a much lower interest rate.
  2. Send you a check for your total balance, including interest.
  3. Hold your funds in an account that may or may not pay interest in the meantime.

The Potential Consequences for Missing Your Grace Period

When you initiate a rollover CD, you should set a reminder for yourself. That way you remember when the CD matures. You can add it to your calendar, schedule an email to yourself or however you keep track of important dates.

Your financial institution also should remind you days or weeks in advance.

Unfortunately, a Clark YouTube channel subscriber wanted to pull her money out of a rollover CD but missed the grace period. And her financial institution stuck her with a much worse interest rate.

Christina wrote:

“Attention all CD depositors. Please hear my story and avoid my huge mistake. Like many of you, my CD expired and was up for renewal. I really couldn’t find a better place to put my money. So I thought I would leave the CD in the same bank. Because I did nothing, the CD rolled over to a new CD automatically for another 12 months. Well, my old CD rate was 4.17%. And I went to the bank knowing my rate would be low. But they advised me my new rate was 0.8%. I was floored!”

Clark, never a fan of banks (especially large ones), called this “standard operating procedure.” Some credit unions even “do this dirty dealing too,” he said.

The “good” news — or at least the silver lining — is that if the interest you’re earning on your CD plunges from nearly 4.2% to 0.8%, if you withdraw your money early from the new term, you won’t be forfeiting nearly as much in interest.

Fortunately, if you find yourself in Christina’s situation, you can pull your money from the new CD term with low consequences.

“So what you’re going to need to do, Christina, you’re going to need to go and terminate that CD and forfeit a worthless 90 days interest because it’s not going to mean anything since you’re getting such a horrible rate of interest,” Clark says.

“And then you’ve gotta think about are you going to do business with that bank anymore. Because again, bankers get up in the morning and try to figure out how they’re going to pinch your wallet. And you’re not going to let them pinch your wallet. You’re going to protect your wallet.”

Clark even heard a recent story about a rollover CD that ended and stuck someone’s money into a savings account paying — wait for it — 0.01% interest.

What You Can Do With a Rollover CD During the Grace Period

I just discussed what can happen if you miss the grace period with a rollover CD. But what happens if you've set a reminder for yourself? Or if you get the bank's notice?

Here are some of your choices when your CD matures:

  • Add money to your CD balance
  • Change the term of your CD
  • Find a different CD with a better interest rate
  • Move your money to a different type of (non-CD) account such as a savings or investing account

This window gives you a chance to be intentional. What if you still want your money in a CD, but at a different term? And what if you can get a much better rate from another institution?

Final Thoughts

If you put your money into a rollover CD, figure out in advance what you want to do when that CD reaches maturity. Then set a reminder for yourself. That way your bank can’t stick you into a CD or savings account with a much lower interest rate because you missed your grace period.

The post What To Do BEFORE Your CD Expires appeared first on Clark Howard.

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