I first heard of this from Jonathan at My Money Blog about two years ago (Warning: Banks Automatically Renew CDs Upon Maturity, 7-Day Grace Periods). Many banks and credit unions automatically renew matured CDs to the same term. Sometimes you only have a very short window of a few days to back out of the renewal.
If you miss the window, you are subject to the early withdrawal penalty on the new CD. The early withdrawal penalty not only takes what you earn in the new term, but it can also eat into your principal.
Apparently this is still happening. Nathalie Martin at Credit Slips reported that a colleague of hers had a CD that matured on April 23. She received a letter from the bank telling her that she had seven calendar days after the maturity date to reverse the renewal. To do that, she also had to visit a branch.
She went there on April 30. It was the last day of the seven-day window but she was told it was too late because it happened to be a Saturday and banks’ computers operated on the following Monday’s date on Saturdays. The early withdrawal penalty would cost her over $1,000 because it wasn’t limited to interest earned in the new term.
She had to complain to the federal bank regulator to get the bank to waive the early withdrawal penalty. Although she was finally made whole, it’s amazing she had to fight that hard for it.
This is a widespread practice at many banks and credit unions.
Trapping customers like this is just wrong. A CD should by default just mature. Either send a check to the customer by mail or deposit it to the customer’s checking account. Auto-renewal has to be an opt-in and the customer should be able to change it any time before the CD matures.
Treasuries and brokered CDs don’t get auto-renewed. When they mature, the money just goes into cash in the brokerage account unless you choose to use the broker’s auto-roll feature. See How To Buy Treasury Bills & Notes Without Fee at Online Brokers.
If you buy CDs directly from a bank or a credit union, set several calendar reminders for yourself starting 30 days from the maturity date. Contact the bank or credit union and tell them what you want to do with the matured CD.
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KD says
After paying taxes on the interest, may be its even worse. There was an interesting article in NYT on a whole asset class (CDs and liquid savings that could pay reasonable interest) starting to vanish due to Fed’s low interest rate policy. I can’t seem to remember the title. But I would like to see you take on it beyond usual repercussions of seniors robbed of their income etc.
Harry Sit says
KD – I will put it into a post next week.
Helena Smith says
I guess each to his own. I love automatic renewal for my emergency fund which is in a CD ladder (6 six-month CDs). Automatic renewal is the perfect plan for a ladder like this, and my bank gives a premium on the interest rate (I think 0.25%)
Harry Sit says
@Helena Smith – Giving the customer an option to auto-renew is completely fine. Make it an opt-in: auto-renew only if the customer asked for it. My objection to the auto-renew policy at Bank of America are that (a) they renew it automatically even if the customer never asked for it; and (b) the window to stop the auto-renewal is too short.
Ken says
Bank of America actually changed their early withdrawal penalties this year. That might have taken effect on her new CD that was automatically renewed. It’s now a flat $25 plus 3% of the amount withdrawn for CDs with terms of 12 months and longer. That 3% would explain the big penalty. Also, it shows how much profitable this change will be for BofA when their interest rates are so low.
Harry Sit says
@Ken – Thank you for that information. An early withdrawal penalty of $25 plus 3% is awful. It takes away all the interest she earned in the previous term and then some. I would call this kind of auto-renewal predatory. IMO an early withdrawal penalty should never be more than the interest earned in the current term.
Shirley Yang says
I would like to renew my church’s CD online since I am the authorized signature person. Can I do that?