U.S. News

Liquidity Fears? Try No-Penalty CDs

Laura Bruce, Bankrate.com

It can be hard committing to lock up your money in a certificate of deposit, or CD, when the economy is rough and the household budget is perhaps a bit shaky. If CDs are to your liking, keep in mind that not all CDs penalize you for withdrawing money before the CD matures.

Admittedly, interest rates are awful, but short-term CDs still compare favorably to most of their more liquid brethren such as money market accounts, or MMAs, and money market funds, MMFs.

The average yield on MMAs, according to Bankrate surveys, is 0.32 percent. The Crane 100 Money Fund Index, published by Crane Data, pegs the average seven-day yield for the 100 largest taxable MMFs at an abysmal 0.09 percent.

Yields on standard CDs are averaging 0.4 percent for three months, 0.58 percent for six months and 0.92 percent for 12 months.

Not so carefree after all
So-called no-penalty, or risk-free, CDs too often aren't quite as carefree as their names imply. You can withdraw funds before the CD matures without penalty, but some banks pay a lower interest rate than what they'd offer on a standard CD of the same maturity. Fortunately, that's not always the case.

Discover Bank has a 12-month, no-penalty CD with an annual percentage yield, or APY, of 2 percent, the same as it ordinarily pays on a 12-month CD in this environment. There's a minimum deposit requirement of $2,500 and the offer expires Dec. 31, 2009.

The hitch on the Discover offer is that you can only withdraw your money without penalty if you are laid off involuntarily. You must be employed full-time and remain employed for 30 days after opening the account. Discover Bank's standard penalty for early withdrawal on CDs with one- to five-year maturities is six months' simple interest.

Steve Olszewski, vice president of deposit products at Discover Bank, says the CD has been attracting consumers.

"What we learned from interaction with our customers is that a lot of people were putting their money into shorter-term savings accounts just because they felt like they were going to need ready access to it. In essence, they were losing the potential for higher earnings from a CD product so we came out with this promotion.

"We tried to make it a bit unique in that we did it on our 12-month product, which is one of the most popular terms out there. The other thing is it's not just for new customers, it's any account that's opened whether it's new or a renewal."

Next: The flexibility advantage...