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### "Breaking" a CD: On a Specific Date ??

Posted: Wed Oct 17, 2018 1:20 pm
I am looking to break a CD with a lower interest rate and move to a higher rate one. I have already run the calculator to prove that the move is beneficial.

The current CD has interest credited monthly on the first of every month. There is 90 day 'Early Withdrawal Penalty" charged. Since I have some flexibility on exactly when to "break" the CD; it seems to make sense that I wait until the 2nd day of the month. That way I don't miss out on the prior month's credited interest.

Does this make sense ? (or am I missing something in the way banks perform the "breaking" transaction ? )
thanks,

### Re: "Breaking" a CD: On a Specific Date ??

Posted: Wed Oct 17, 2018 1:48 pm
SanityCheck wrote: Wed Oct 17, 2018 1:20 pm I am looking to break a CD with a lower interest rate and move to a higher rate one. I have already run the calculator to prove that the move is beneficial.
The current CD has interest credited monthly on the first of every month. There is 90 day 'Early Withdrawal Penalty" charged. Since I have some flexibility on exactly when to "break" the CD; it seems to make sense that I wait until the 2nd day of the month. That way I don't miss out on the prior month's credited interest.
Does this make sense ? (or am I missing something in the way banks perform the "breaking" transaction ? )
thanks,

Yes - makes perfect sense.

I am in this business and it depends on the details of what the bank or credit union does.

The relevant question is whether or not the bank or credit union pays interest to the day of your breaking the CD or not. So, for example, if you break the CD on the 27th of a month, will you get credit for the 27 days of that month or not? Either is OK, BUT it needs to be in the "disclosure".

### Re: "Breaking" a CD: On a Specific Date ??

Posted: Wed Oct 17, 2018 2:30 pm
I do this. I check the web to be sure the interest has been credited.

### Re: "Breaking" a CD: On a Specific Date ??

Posted: Wed Oct 17, 2018 2:53 pm
Here is a federal credit union example. Note that credit union "dividends" are what credit unions call "interest".

So, for this credit union, it would make sense to break the certificate/CD right after dividends/interest is posted.

https://www.arlingtoncu.org/Content/Upl ... E.FORM.pdf

5. ACCRUAL OF DIVIDENDS. Dividends will begin to accrue on the business day that you deposit noncash items (e.g. checks) to your account. If you close your account before dividends are paid, you will not receive the accrued dividends.

### Re: "Breaking" a CD: On a Specific Date ??

Posted: Wed Oct 17, 2018 8:07 pm
I guess that different institutions have varied penalties for breaking CDs of similar maturities?
Do some institutions claw back principal as well as interest if a CD is "broken"?

### Re: "Breaking" a CD: On a Specific Date ??

Posted: Wed Oct 17, 2018 9:02 pm
You don't lose the accrued interest at Ally Bank. In one account I see the CD with a value of \$100K and accrued interest of \$1,613.37. Ally shows the amount received after the EWP as \$101,287.84.

Kevin

### Re: "Breaking" a CD: On a Specific Date ??

Posted: Thu Oct 18, 2018 7:39 am
Wakefield1 wrote: Wed Oct 17, 2018 8:07 pm I guess that different institutions have varied penalties for breaking CDs of similar maturities?
Do some institutions claw back principal as well as interest if a CD is "broken"?
Yes. If the penalty is 6 months of interest and you break the CD after 3 months, they will take 3 months of interest out of principal.

### Re: "Breaking" a CD: On a Specific Date ??

Posted: Thu Oct 18, 2018 8:11 am
rkhusky wrote: Thu Oct 18, 2018 7:39 am
Wakefield1 wrote: Wed Oct 17, 2018 8:07 pm I guess that different institutions have varied penalties for breaking CDs of similar maturities?
Do some institutions claw back principal as well as interest if a CD is "broken"?
Yes. If the penalty is 6 months of interest and you break the CD after 3 months, they will take 3 months of interest out of principal.
Out of curiosity -- how is this number defined?

6x the first month's interest? (ie, one month interest rate times your initial principle times 6)
The total (compounded) interest for the first six months?
The total of the previous six months of (compounded) interest?

### Re: "Breaking" a CD: On a Specific Date ??

Posted: Thu Oct 18, 2018 12:05 pm
Wakefield1 wrote: Wed Oct 17, 2018 8:07 pm I guess that different institutions have varied penalties for breaking CDs of similar maturities?
Do some institutions claw back principal as well as interest if a CD is "broken"?
Yes. Some will limit the penalty to accrued or paid interest (not break into principal), while others will break into principal with the penalty. It would be in the "disclosure".

### Re: "Breaking" a CD: On a Specific Date ??

Posted: Thu Oct 18, 2018 12:07 pm
ryman554 wrote: Thu Oct 18, 2018 8:11 am
rkhusky wrote: Thu Oct 18, 2018 7:39 am
Wakefield1 wrote: Wed Oct 17, 2018 8:07 pm I guess that different institutions have varied penalties for breaking CDs of similar maturities?
Do some institutions claw back principal as well as interest if a CD is "broken"?
Yes. If the penalty is 6 months of interest and you break the CD after 3 months, they will take 3 months of interest out of principal.
Out of curiosity -- how is this number defined?

6x the first month's interest? (ie, one month interest rate times your initial principle times 6)
The total (compounded) interest for the first six months?
The total of the previous six months of (compounded) interest?
Not sure - each bank or credit union might do it differently. Some use days (such as 90 or 180) instead of months. There is probably not much difference in the methods -- except when the redemption is sooner than the penalty days or months.

### Re: "Breaking" a CD: On a Specific Date ??

Posted: Thu Oct 18, 2018 12:08 pm
rkhusky wrote: Thu Oct 18, 2018 7:39 am
Wakefield1 wrote: Wed Oct 17, 2018 8:07 pm I guess that different institutions have varied penalties for breaking CDs of similar maturities?
Do some institutions claw back principal as well as interest if a CD is "broken"?
Yes. If the penalty is 6 months of interest and you break the CD after 3 months, they will take 3 months of interest out of principal.
That all depends on the bank or credit union. Some will take the penalty out of principal, if so calculated and some will not.

### Re: "Breaking" a CD: On a Specific Date ??

Posted: Thu Oct 18, 2018 2:25 pm
ryman554 wrote: Thu Oct 18, 2018 8:11 am
rkhusky wrote: Thu Oct 18, 2018 7:39 am
Wakefield1 wrote: Wed Oct 17, 2018 8:07 pm I guess that different institutions have varied penalties for breaking CDs of similar maturities?
Do some institutions claw back principal as well as interest if a CD is "broken"?
Yes. If the penalty is 6 months of interest and you break the CD after 3 months, they will take 3 months of interest out of principal.
Out of curiosity -- how is this number defined?

6x the first month's interest? (ie, one month interest rate times your initial principle times 6)
The total (compounded) interest for the first six months?
The total of the previous six months of (compounded) interest?
I believe it varies. From my calculations, Ally Bank seems to base the EWP on simple interest (i.e., not compounded). It doesn't make a huge difference, especially at low rates.

Kevin

### Re: "Breaking" a CD: On a Specific Date ??

Posted: Thu Oct 18, 2018 2:29 pm
I believe it varies. From my calculations, Ally Bank seems to base the EWP on simple interest (i.e., not compounded). It doesn't make a huge difference, especially at low rates.
Yes. One credit union discloses a 90 day dividend(interest) penalty - and it is calculated as (90 days x rate x amount)/365