Are No-Penalty CDs a good choice?

By Sabrina Karl

When putting your cash into a bank or credit union, there are more choices than plain vanilla savings accounts and conventional certificates of deposit. One hybrid product to consider is a no-penalty CD as it balances the quest for maximum returns with the desire for easy access to your funds should you need them.

No-penalty CDs, sometimes called no-risk or risk-free CDs, are exactly what they sound like. Instead of the early withdrawal fees that traditional certificates charge if you cash in before maturity, you can take all or some of your funds out of a no-penalty CD at any time with no loss of interest or principal.

The one exception is that most no-penalty CDs will require you to lock your funds in for about a week. Then the no-penalty period will kick in.

The trade-off, as you might predict, is you’ll typically earn a lower interest rate for no-penalty certificates than you could earn by fully committing your funds to a traditional term. The difference varies widely by institution, but can be significant.

On the flip side, you can usually earn more with a no-penalty CD than with a simple savings account. That’s what makes the risk-free CDs a hybrid: they typically sit between the earnings potential of savings accounts and standard certificates, while also offering a withdrawal flexibility that lies between the two.

Since most no-penalty certificates have terms around 12 months, they make good sense for savers who want to sock some money away but aren’t certain they can leave it untouched for a year. If instead you want frequent withdrawals of your funds, a high-yield savings account will suit you better, while those with high confidence they can hold their funds in place for a year or longer will earn more with a conventional CD.

Why auto-renewing your CD is almost always a mistake

By Sabrina Karl

Whenever you have a CD approaching maturity, take a page from the book of the savviest CD savers, who virtually never let their certificates roll over into an auto-renewed CD. Here’s why.

Usually about a month before your CD expires – when you can withdraw your principal and interest without incurring an early withdrawal penalty – the bank or credit union will notify you of the certificate’s upcoming maturity date. It will also provide instructions for indicating what you want done with the money, as well as what the bank will do with it should you fail to respond by the deadline.

If you don’t provide instructions – whether accidentally or intentionally – most institutions will roll the maturing funds directly into a new CD of an identical or similar term length. And therein lies the rub.

The CD market is chock full of options from hundreds of institutions offering a wide spectrum of rates – including plentiful specials and promotions – so smart CD saving always involves shopping around for competitive returns. Allowing auto-renewal forfeits all opportunity to seek out a top APY, as well as steals your chance to change your term or take the money elsewhere.

Instead, you’ll find yourself committed to what’s likely a standard or even lackluster rate, and for a fresh term that could be several years long.

This is particularly true when the maturing certificate was promotional. If you allow auto-renewal, your funds will roll into a standard CD (rollovers into special CDs are essentially unheard of), and that everyday rate is unlikely to be exceptional, and may not even be competitive.

What if you accidentally blow it and your CD auto-renews? Fortunately, most banks offer a grace period to cancel the new certificate without penalty. But it’s typically just 5 to 15 days, so you’ll need to act fast.

Buying long-term CDs? Learn what smart CD shoppers look for.

By Sabrina Karl

For anyone wanting to sock away savings untouched for a few years, long-term CDs can be a smart move since they pay the highest guaranteed interest rates. But since these certificates keep your money locked up for a relatively long period (generally 4 to 7 years), some extra caution is required to make a smart CD choice.

All CD banks and credit unions stipulate an “early withdrawal policy” in their terms, informing the saver before they open a certificate what penalty they’ll incur should they cash out before the CD matures. The penalty is generally a forfeiture of interest the bank would have paid you (it does not trigger any tax penalties by the IRS).

Savvy savers pay attention to the early withdrawal policy because the penalties vary widely. Some banks charge as little as 3 to 6 months’ interest, while others take back as much as 2 years’ worth. Even worse, some charge a flat fee or percentage, leaving you at risk of losing some of your principal – a scenario to be avoided at all costs.

If you want to keep your options open to cash out early, either because you might need the money for something else or because the Fed has caused rates of new CDs to rise, you’ll want to stick to certificates with a penalty of 6 months of less. If instead you’re tempted by a CD with a chart-topping rate, but also a hefty early withdrawal penalty, you’ll want to avoid it unless you have very high confidence you can hold the certificate to maturity.

Incurring an early withdrawal penalty is not itself a mistake. Cashing out prematurely can be your best move for a number of reasons. The mistake is not knowing beforehand what a CD’s penalty will be, leaving you prone to a losing proposition.

How do high-interest checking accounts work?

By Sabrina Karl

Imagine a checking account with all the standard transactions you’d expect from a checking account, but paying 2, 3 or even 5 percent interest on your balance. Since most checking accounts pay no interest at all, and even the top-paying savings accounts in the country offer less than 1.5 percent, you’d be smart to ask, “What’s the catch?”

These accounts are typically called “high-interest checking accounts”, and though they have a number of strings attached, they aren’t a scam. They’re legitimate accounts, usually offered by smaller banks and credit unions, that simply have very specific requirements for earning the off-the-charts interest rate they advertise.

The most common hoop you’re required to jump through is using your debit card a minimum number of times each month, and we’re not talking about three or four transactions. A typical requirement is 12 debit transactions per statement cycle, and I’ve even seen an account requiring 20. The purchases will also have to be signature, not PIN-based, transactions.

Other typical stipulations include paying at least some number of bills online each statement cycle, setting up direct deposit, and at some banks, opening a credit card with that institution. Signing up for electronic statements is almost always required.

One caution is to check the account’s balance cap. Most high-interest checking accounts specify a maximum balance that can earn the high rate, with anything above that threshold earning zero or near-zero interest. Sometimes the balance cap is an accommodating $10,000 or $20,000. But accounts with caps of just $1,000 or $2,000 won’t be worth your trouble.

If frequently using your debit card is easy for you, a high-interest checking account could significantly boost the interest you earn from your regular banking. Just be warned that the bank will only pay that chart-topping rate in months where you meet every requirement.

Savings account money market... Whats the difference?

By Sabrina Karl

Whether you’re saving for a home or a vacation, or just socking away money in an emergency fund, putting your savings in an account that’s firewalled from your day-to-day spending is a smart strategy.

But as soon as you begin exploring where to stash the money, you’ll be faced with a choice: should you open a savings account or a money market account? Many banks and credit unions offer both, so it can be confusing how they differ.

The distinction has more to do with rules the bank has to follow for each account than it does with how you can use them. Indeed, for most savers, the two are interchangeable: both will pay you interest, both let you deposit as often as you like, and both will be federally insured (assuming the account is with an FDIC bank or an NCUA credit union).

Savings and money market accounts both also limit how many withdrawals you can make. That number is set by federal law, so it doesn’t matter which account type or institution you choose – six withdrawals per statement cycle will be your max.

But withdrawals are also where you might notice a distinction. Money markets typically offer paper checks you can write on the account, giving you more ways to access your funds than the electronic transfers and ATM withdrawals you’ll be limited to with a savings account.

This greater flexibility in retrieving your money comes at a price, of course. Although banks vary, savings accounts generally pay higher interest rates.

That means the best choice will depend on whether check-writing privileges are useful for how you’ll use the account. If they are, look for the best-paying money market you can find. But if not, shop both account types and make the interest rate your priority.