Penalty Free CD Withdrawals?
By: Brian O'Connell

In our “Deals of the Week” segment, BankingMyWay noted the emergence of a penalty-free CD withdrawal from Discover Bank (Stock Quote: DFS). The deal enabled account holders who lost their job to take money from their CD account – with no fees or other financial repercussions.

It’s a new trend and most banks – with a few exceptions – aren’t following suit. But with banks increasingly aggressive about taking steps to keep customers on board no-penalty CD’s may become a necessity, and not a luxury, for struggling financial institutions.

Who’s on board already? Besides Discover Bank, two other big banks – Ally Bank (formerly GMAC bank) and Bank of America (Stock Quote: BOA) – offer no-penalty CDs.

Ally offers a nine-month CD with an interest rate of 2.50%. That’s far and away above the average CD rate as measured by the BankingMyWay weekly CD rate tracker. But Ally raises the roof even higher with the no-penalty feature. According to the bank’s web site, Ally will not charge CD customers any fees for taking cash out early. And the no-penalty feature is almost without exceptions: customers can withdraw funds at any point before the nine-month are up, including interest earned on the investment. Ally reserves the right to assess fees on CD holders who withdraw funds during the first six days after the CD is purchased.

Bank of America is also touting its own version of a no-penalty CD. The bank calls it “The Bank of America Risk Free CD,” saying it has “the return of a CD, and the flexibility similar to a savings account”.

According to the bank’s web site, “the Bank of America Risk Free CD gives you the ability to access funds prior to the maturity date without penalties”. A $5,000 minimum deposit is required and applies to the bank’s nine-month Risk Free CD. Like Ally Bank, Bank of America will waive the early withdrawal penalty after the first six days of the account term (or the first six days following any partial withdrawal). The bank does require a seven-day advance notice, something Ally doesn’t ask of its CD clients.

Banks may not admit it, but most financial institutions will have to be dragged kicking and screaming to penalty-free CDs. Early withdrawal fees are too fat and too constant for banks to cut them from the bottom line (Chase Manhattan (Stock Symbol: JPM) slaps early withdrawal CD customers with 180 days interest for early withdrawal on its 12-month CD.)

But with CDs still popular in a time of economic pain, and customers growing accustomed to raiding their CDs for cash when needed, like it or not, expect more banks to follow the Discover Bank CD model.

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