Be Aware of Automatic CD Renewal

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When opening a certificate of deposit account, you agree to a specific investment term at a specific rate of interest. What many investors don’t realize is in many cases, once your CD term is up, you must provide the bank with instructions to cash out the deposit upon maturity or it will be reinvested for the same amount, term length and interest rate.

This process is called automatic CD renewal. While it does not apply to all CD accounts, it may surprise you if you aren’t aware of it.

Find Out If You Agreed to Automatic CD Renewal

Terms and conditions: A good place to start for information about your CD is the terms and conditions document that was given to you when you opened your account. If your CD is eligible for automatic renewal, it should be stated clearly there. Automatic CD renewal rates and a CD renewal date should all be made clear for you – if not, make the effort to find out.

Mail from your bank: As your CD’s maturity date approaches, be alert to mail from your bank regarding your account. Most banks will send you advance notice in writing, notifying you of the upcoming maturity date and requesting instructions from you as to how to handle the account.

Typically, you will be given a grace period around the maturity date during which you will be allowed to cash out your certificate of deposit before it rolls over. You must act within this window of time, otherwise you will be locked into a new term and corresponding interest rate when the bank automatically renews the CD.

Disadvantage of Automatic CD Renewal

While the automatic renewal of CDs can be very convenient, you should still be very aware of your CD’s maturity date. Often, an account may be a good investment at one time, but is no longer in the future.

One of the problems with automatic renewal is your CD will not necessarily roll over into an account with the same interest rate you started with. CD rates tend to track very closely to inflation.

So if, for example, you opened a 2 year CD when interest rates were at 2-3 percent, if it matures during an inflationary period, your interest rate could be as low as .50-1%. If you are locked into that rate for another 2 year term, you would not only lose access to your funds but not earn much of a return either.

If you don’t want to reinvest in the same type of CD account, you want to be aware of automatic CD renewal and take advantage of your grace period (automatic CD renewal time) while you can. That way, you can shop around for the best CD interest rates available to you.Enhanced by Zemanta