Can Banks or Credit Unions Change the Terms of Existing CDs?

I recently ran across a rather disconcerting bit of news about a credit union that changed the terms of their existing CDs. The institution in question is Fort Knox Credit Union, which is based out of Radcliff, KY.

In short, they’ve decided to increase the early withdrawal penalty on all 24 month and longer CDs from 90 days to a full six months. They claim to be able to do this because they’ve reserved the right (in their membership agreement) to make such changes with 30 days notice.

The big concern here is that an increase in the early withdrawal penalty effectively reduces your interest rate if you break your CD early. While I don’t own any Fort Knox Credit Union CDs, I do own some five year CDs from Ally Bank that have a low (60 day) penalty, which means I can easily break them early if rates rise.

Fortunately, Ally has assured customers that they’ll honor the existing penalties at least until their CDs mature. Rather, if they were to make a change, it would be with 30 days notice, and it would only apply to new CDs. Nonetheless, this is just one more thing to keep in mind when comparing CD rates across banks.

Hat tip: The Finance Buff

10 Responses to “Can Banks or Credit Unions Change the Terms of Existing CDs?”

  1. Anonymous

    Wow, I wasn’t expecting to read about Fort Knox Federal Credit Union here. I’m actually a member. Let me just say that I am VERY pleased with this credit union… not that it really matters to most of you, because it is a small, local-only establishment. I just wanted to note that they have some of the best rates / offers of any financial institution I have been able to find (excluding of course high-yield, online-only checking accounts, etc.)

    Personally, I could care less whether they change their penalty periods for closing CDs. When you purchase a CD, you make an agreement to keep that money there for a certain period of time. Yes, rates will change a little during the term of your CD. That’s why you should create ladders, diversify, etc. If you put more than a relatively small chunk of money into any one single CD, then you are not being smart with your money anyway.

    One other thing (and I’m sure some people will disagree with this as well)… How much more money do you really think you could earn by terminating one of those CDs early and jumping to a new one? Their current rate on a 60 month CD is 2.65% APY.

  2. Anonymous

    Yes — you always have the option of closing your account and paying the old penalty, and that’s a good point. So long as it doesn’t happen in the first 2-4 months of your CD term, you come out okay.

    It does mean you have to watch your statements for such a notice, though. How many of us carefully read the monthly statement on our CD?

    I am in no way saying this is a bad plan, or that Ally is likely to use their legal wiggle room. I’m just noting that it exists, and to some extent, choosing this approach means placing some faith in Ally’s good will toward customers.

  3. Nickel

    Mike: I seem to recall reading somewhere else in their terms that they are required to give you 30 days written notice of any changes, in which case you could just break your CDs before the penalty increases. Not an optimal solution, but it does give you a level of protection (the “nuclear option”) if they decide to play games.

  4. Anonymous

    Sure — depository agreement is at The 60-day penalty is mentioned on p.3 (section B2) and on p.5 (section B6, under “Early Withdrawals”).

    Keep reading. In C34, it states:
    “We reserve the right to delay, discontinue or make changes to accounts or services, and to convert your existing accounts and services into new accounts and services. You may not get advance notice of this. We may change this Agreement, and we may add to or delete from this Agreement, and the updated agreement will supersede all prior versions. We will provide notice of changes, additions, and deletions as required by law. If you do not agree with a change, you may close your account(s) before the effective date of the change, addition or deletion.”

    Translation — we promise to be nice and have changes apply only to new accounts, but we’re not legally obligated to do so.

  5. Anonymous

    Rates should be going up, which should mean higher CD rates offered not lower.

    This is just another in the long list of unintended consequences of all the “helpful” consumer regulations imposed by Dodd-Frank… When banks/credit unions costs rise, our costs will rise.

  6. Anonymous

    I take this as an omen that rates are going to be rising soon.

    Time to start hedging.

    Mike B) can you support your claims about Ally — where is this fine-print that they can change the terms of the contract willy-nilly?

  7. Anonymous

    Can they? Good question and the humble probably consumer does not have the resources to cost effectively legally challenge the bank / credit union.

    The impact would depend on the penalty. Normally it is forfeited interest. If rates are going up you could use this as a opportunity to withdraw your money, take the hit, and deposit it with a more reputable institution at a higher rate of return.

  8. Anonymous

    It’s worth noting that despite Ally’s public statements that they wouldn’t, they’re not binding contracts. Meanwhile, their depository agreement, which is, says they can do exactly that.

    I believe they have to give you notice, at which point you have the option of immediately withdrawing all your CDs at the lower penalty — but penalty there still would be.

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