No-Penalty CDs Are Far From No-Brainers

One of the major drawbacks of certificates of deposit (CDs) is that you can't get to your money until the CD matures. So a CD that allows you to withdraw your money early, without fear of penalty, would be an easy choice, right? The problem is, deciding between a no-penalty and a conventional CD is a bit more complicated than it might seem.

Early-withdrawal fees on conventional CDs typically will cost you a few days to a few months worth of interest, depending on the term of the CD. But banks do offer no-penalty CDs -- also called liquid CDs or risk free CDs -- because customers have made it clear they want them. "Customers find no-penalty CDs an attractive product," says Doug Johnson, senior vice president with the American Bankers Association. "And many banks do it as a way to bring other business into the bank."

In fact, some banks require customers to open another account to avoid a penalty. The reason: banks need your deposit dollars. No-penalty CDs that require a second account encourage a consumer to develop a relationship with a single institution, instead of simply chasing the best CD rates from bank to bank. Even so, it pays to shop around, especially since no-penalty CDs come in all shapes and sizes. ...