Minding Your Bank: Why You Have to Be Careful When Your CD Matures
Certificates of deposit (CDs) appeal to many savers and investors because they offer fixed returns with almost none of the potential risk factors associated with other types of investments.
The Federal Deposit Insurance Corp. also insures CDs for up to $250,000.
Certificates of deposit have grown in popularity in recent years as the Federal Reserve hiked interest rates to tame inflation.
Current interest rates for one-month to 64-month CDs range from about 4.5 to 5.5%, which allows savers to lock in a strong interest rate for both short- and long-term certificates of deposit.
When your CD matures, you can either take the cash and walk away or roll the funds over into a new certificate of deposit.
It’s super important to keep an eye on your CD’s term or length because if you aren’t paying attention, you may find that your funds have been auto-enrolled into another CD if you didn’t choose to cash it out after maturity.
What Does It Mean When a CD Matures?
Before jumping into the ins and outs of certificates of deposit, it would be helpful to define three terms commonly used when discussing CDs.
Terms for certificates of deposit typically range from a few months to five years, but financial institutions are free to set their term lengths. Here are six of the most common CD terms:
When your CD term ends (reaches its maturity date), you can either roll the funds over into a new CD or take possession of your original deposit and all of the accrued interest you’ve earned, provided you’ve put the wheels in motion to cash out your CD.
Read on to learn about your financial options when your CD matures.
Which Banks Have the Best CD Rates?
Numerous banks offer CDs, and there’s strong competition among them to offer competitive rates. We’ve compiled a list of some of the best CD accounts to help you find the ones that best fit your financial goals.
What Happens to Your Money When a CD Matures?
After your certificate of deposit reaches its maturity date, you have a short time frame to decide what to do with the money — delay, and your bank or credit union ultimately will decide for you.
The small window of time after your CD matures is called the grace period. Grace periods vary between financial institutions, but typically you’ll have between one and three weeks to notify your bank of your intentions, which are:
CD Cash Out
After your CD matures and before the grace period ends, you can access your funds penalty-free. You are free to walk away with your original CD deposit and the interest it earned.
If you need access to more liquidity, cashing out may be your best option. If not, there are two other ways to spend your money.
Purchase Another Certificate of Deposit
Today’s high interest rate environment makes CDs an attractive investment option.
If you don’t have compelling reasons to withdraw your funds, you could put your money back to work by purchasing another CD with similar terms.
You could also purchase multiple CDs with varying maturity dates — an investment strategy known as CD laddering.
CD Auto-Renewal
If you don’t act during the grace period, your financial institution will likely automatically renew your CD at the same term as its currently offered interest rate.
This could prove financially harmful if you need the additional liquidity that comes with cashing out your CD or if the current renewal interest rate is lower than rates you could find elsewhere if you shop for CDs at other banks and credit unions.
Auto-renewal limits your options but is a convenient way to renew your position on another certificate of deposit.
How Do You Know When a CD Matures?
As noted, there’s only a short period to act after your CD matures to move your money around.
Most banks will default to auto-renewal if they don’t hear from savers after sending out a notice that their CD terms have reached their maturity date.
Financial institutions will alert customers either by email or standard mail that their CDs are nearing their maturity date.
This correspondence will have a deadline for savers to notify their bank or credit union of their intentions.
You’ll receive this notification as many as three weeks ahead of your CD’s maturity date, and you’ll have up to three weeks after the term ends to notify your financial institution of your decision.
Why It’s Important to Know When Your CD Has Matured
If you don’t receive notice that your CD term is nearing maturity or you tuck the maturity notice in your desk drawer and forget about it, you’ll likely find that your bank has automatically renewed your CD.
If that happens, you won’t be able to access your funds without incurring an early withdrawal penalty, which is usually calculated as a portion of the interest that would have accrued over a set time frame.
Acting during the grace period is crucial because it’s the only time you’ll be able to access or move your money around without incurring any type of penalty.
Here are three reasons why it is important to get your strategy in play as soon as your CD matures:
Auto-Renewal Into a Less-Favorable Interest Rate
CD rates vary between financial institutions.
Online banks, in particular, tend to offer the highest available CD interest rates to savers because they don’t have the same overhead and cost structures as brick-and-mortar banks and credit unions.
Having your CD auto-renewed robs you of the opportunity to make the same amount of money work harder.
Lack of Liquidity
CD’s are great savings tools.
Unlike some investments, though, certificates of deposit can limit your access to liquidity.
If you didn’t alert your bank during the grace period of your intentions to collect your funds when your CD matures, you won’t be able to access your money without incurring a penalty.
Better Uses
Depending on your financial situation and liquidity needs, there could be better or less restrictive places to park your funds.
Money market accounts, for instance, may offer competitive interest rates while still allowing you to access your funds (even if it’s on a limited monthly basis).
High-yield savings accounts also offer much higher annual percentage rates than standard savings accounts without the liquidity restrictions of a CD.
Maturity Notice Policies from 5 Financial Institutions
Maturity notices aren’t standardized among banks and credit unions.
If you have any questions about how your financial institution handles maturity dates, grace periods, and renewal options, visit a branch in person or call customer service.
Frequently Asked Questions
Not with standard CDs. Some financial institutions offer “add-on” CDs which allow you to make additional contributions to the CD after it’s opened. Note that “add-on” CDs are different from “bump-up” or “raise-your-rate” CDs, which allow you to realize a one-time raise in interest rate during the term of the CD.
You can once it matures. Typically, all funds are locked in until the CD reaches its full term unless you pay an early withdrawal penalty. Some institutions may allow savers to withdraw their credited interest. Check with your bank.
You may be able to choose this option through your institution’s online banking app, or by speaking with a banking representative in person or on the phone.
