How to calculate penalty for early withdrawal of certificate of deposit?

Question

I haven't invested in a cd for many years. I am playing around with figures and am considering investing..let's say in a $1,000 cd at my neighborhood credit union. The APR is 5.13% and the APY is 5.25%

Question # (1) The paperwork states:
"If funds are withdrawn prior to maturity, a penalty will be imposed as follows: The dividend for the last 120 days on terms of 12 months or greater; 60 days for dividends for terms less than 12 months will be forfeited whether or not earned. Penalty will be calculated on the original certificate principal amount. Principal may be reduced by amount needed to satisfy penalty." How would I calculate the amount I would lose if I withdrew after, say, 6 months ? I'm just trying to get estimate of what I might possibly lose if, a few months into the future I want to withdraw.

Question (2) Would early withdrawal hurt my FICO score/Credit Rating? Would it hurt my "good reputation" with my credit union?

Answer 1

Credit unions use some specialized terminology, "dividends" is commonly known as "interest".

The penalty is based on the term (maturity) of the CD. For CDs with a twelve month, or longer, term the penalty is 120 days interest. For CDs under twelve months, the penalty is 60 days interest. This penalty may reduce the principal on deposit.

I recommend asking how they pay interest. Usually the depositor gets all CD interest at maturity. Let's say you open a five year CD, then for whatever reason withdraw the money after six months. The penalty is 120 days interest because the term is more that twelve months. Does the credit union pay you six months of interest before deducting the penalty? I believe most do not pay the interest but some do. I think either way is legal as long as the institution discloses properly.

If you are considering withdrawing early, I recommend against a CD. You might want to look into the specifics of when you might need the money, additional interest income versus potential penalty etc.

Not 100% sure, but I do not think early withdrawal hurts your FICO score. I do not think it would hurt your reputation with the credit union either.

Answer 2

When I had to sell my CD early, the bank told me exactly what the penalties were... I remember it being quite a bit actually. Since every CD is different in terms of when you actually want to sell it, I'd just ask the bank or brokerage firm the question; I'm sure they'd be happy to let you know.

Answer 3

Given the amount you are investing and the possibility of early withdrawal, you might want to just open a savings account with an online bank.

Emigrant Direct is currently offering 5.05%.
It's FDIC insured and you can withdraw money at any time...the account is linked to your checking account.


www.emigrantdriect.com.