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Getting out of a CD early will cost you

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By Todd Wallack
Globe Staff / May 29, 2011

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Savers, already enduring near record-low interest rates on certificates of deposit, face a fresh insult: Banks are slamming customers with steeper penalties if they try to withdraw their money early.

The state’s three biggest retail banks — Bank of America, Citizens Bank, and Sovereign Bank — have significantly increased early-withdrawal fees in recent months. In many cases, the penalties are so steep that they would not only wipe out accrued interest, but also eat into the principal.

“It’s a real eye opener,’’ said Greg McBride, an analyst for Bankrate.com, which tracks CD rates. “The whole reason people invest in CDs is they want to preserve their principal without putting it at risk.’’

For instance, a Bank of America customer who closes a one-year $10,000 CD early would face $325 in penalties, 18 times more than the old amount, and far more than the $35 in interest the customer would have eventually earned on the CD at current rates.

Certificates of deposit often pay higher interest rates than traditional passbook savings, but require customers to leave the money in the bank for set terms, typically between a few months and five years. Some consumer advocates say higher penalties for early withdrawal are the latest effort by banks to find revenues to offset losses from bad loans and the cost of complying with new federal regulations.

Many banks are also doing away with free checking, raising credit card interest rates, and charging higher ATM fees.

“It’s consistent with their aggressive strategy to increase fee income,’’ said Deirdre Cummings, legislative director for the Massachusetts Public Interest Group, a consumer advocacy group based in Boston.

Bank of America, the state’s largest bank, used to charge customers between three months’ and one year’s interest if they withdrew money early. But in February, the bank started charging a $25 fee, plus 1 percent of the withdrawn amount for CDs that mature in less than a year, and 3 percent for longer-term deposits. Bank of America spokesman Anne Pace said few customers will ever incur the penalty because a fraction of 1 percent of CD balances are withdrawn early.

In addition, she said, the new penalties will only apply to CDs opened or renewed after Feb. 14, so customers in the middle of deposit terms won’t be affected.

Citizens Bank used to charge customers between 90 and 180 days of interest, depending on the length of the CD. But it now charges customers a flat $50 fee — plus a penalty at least as large as the old one.

In addition to the flat fee, short-term CD customers will pay 90 days’ interest on the amount withdrawn or half the remaining interest left, whichever is greater. On deposits of one year or more, they’ll pay 180 days’ interest or half the remaining amount of interest.

As a result, a customer who invested $10,000 in a two-year CD paying 1 percent interest would pay $125 in penalties, up from $50 under the old fee schedule, if the person withdrew the money after six months.

Citizens spokesman Jim Hughes said the bank advises customers who might need access to the cash to use other accounts, such as a savings account or “breakable CD’’ that allows a one-time, penalty-free withdrawal, though it generally has a higher minimum balance and pays lower rates. He also said the bank doesn’t levy the penalty in certain circumstances, such as when the customer dies or is disabled.

Sovereign boosted its penalties in New England last month. For CDs of five years or longer, the bank now charges customers one year’s interest — up from six months under the old rules — for early withdrawal. Early withdrawal penalties for shorter-term CDs will remain at three to six months’ interest. Sovereign also said it expects few customers to be affected because most hold the CDs until they mature.

McBride of Bankrate.com said higher penalties aim to discourage depositors from ditching CDs as soon as interest rates rise. Currently, rates on five-year CDs average just 1.7 percent, unusually low by historical standards.

“It’s designed to make sure CD investors truly have the commitment they are signing up for,’’ McBride said.

McBride said customers should think carefully about tying up money for lengthy periods if they might need the cash or worry interest rates could rise.

Many banks offer “liquid’’ or “no penalty’’ CDs that let customers withdraw money at any time without penalties, though interest rates are generally lower. In addition, some banks offer “step up’’ CDs that allow customers to get a better rate if interest rates rise.

Some analysts say the Federal Reserve could begin boosting its lending rates as early as this year if the economy improves, which in turn would increase rates for CDs and savings accounts. But with high unemployment and uncertain economic conditions, it’s still anyone’s guess when exactly rates will rise.

“It’s kind of like judgment day,’’ McBride said. “Some people are willing to circle a day on the calendar. The rest of us know it’s coming eventually, but don’t know exactly when.’’

Todd Wallack can be reached at twallack@globe.com.