Should You Ever Break an Old CD Contract?

One of the downsides of certificates of deposit (CDs) is that you lose access to your money for the length of your CD contract. That's the tradeoff for earning a guaranteed return.

That means interest rates can rise, and your cash is stuck earning a lower rate. But breaking a CD contract often comes with penalties, and in some cases, it might not be worth the cost. Here are three things to consider before deciding if breaking an old CD makes sense for you.

1. Check the early withdrawal penalty

CDs are designed to hold your money for a fixed period, and banks charge a penalty if you withdraw early. These penalties vary but typically follow this structure:

• Short-term CDs (6-12 months): Usually charge three months of interest.
• Medium-term CDs (1-3 years): Often charge six months of interest.
• Long-term CDs (4 years or longer): Could cost a full year's worth of interest.

Before cashing out your CD early, check your bank's specific penalty and calculate how much interest you'll lose. If the penalty wipes out all or most of your earnings, it might not be worth it.

Earn a similar rate to CDs and access your money whenever you need it. Check out our list of the best high-yield savings accounts now.

2. Consider no-penalty CDs

If you think interest rates might keep rising but don't want to get stuck in another long-term contract, consider a no-penalty CD. These accounts let you withdraw your money early without a fee, giving you flexibility if rates continue to climb.

The trade-off? No-penalty CDs often have slightly lower interest rates than traditional CDs. But if flexibility is your priority, they can be a great alternative.

3. Look at other high-yield options

CDs aren't your only choice for earning interest. High-yield savings and money market accounts currently offer rates similar to CDs, but with more flexibility. You can earn a great return on your cash while being able to access it whenever you need. Emergencies happen, and you won't need to stress if you have to dip into savings.

Breaking a CD contract is generally a bad idea

Breaking an old CD contract can make sense if the numbers work in your favor, but that's hard to find. Check your penalty, compare interest rates, and consider a high-yield savings account before making a decision. If you stand to gain significantly in the long run, making the switch could be a smart move.