Is Closing a CD Early Ever a Good Idea?

When you open a certificate of deposit (CD), you're making a pretty big commitment. You're entering into a contract with the bank that says you're not going to take money from your account until your CD term ends. Breaking this rule leads to penalties.

But there are a few times when closing a CD could be the best move for your finances. It all hinges on consequences.

What happens when you close a CD early?

Closing a CD early triggers an early withdrawal penalty. The minimum penalty by law is seven days' simple interest. But there's no maximum on what banks can charge. Generally, longer-term CDs carry larger penalties than short-term CDs.

For example, the early withdrawal penalty for a Capital One 360 CD is:

• CDs with terms of 12 months or less: Three months of simple interest
• CDs with terms greater than 12 months: Six months of simple interest

The exact amount of your penalty depends on how much you have in your account and its interest rate. If you had $1,000 in a 1-year CD and it earned a 5% interest rate, you'd lose $12.20 if you had a 3-month penalty. For a 2-year CD with a 5% interest, a $1,000 balance, and a 6-month interest penalty, you'd lose $24.40.

In addition, you're missing out on the remaining interest payment you could've gotten had you kept the CD open. Remember, CDs require you to withdraw your cash all at once. In our example of a 1-year CD with a 5% rate, you'd forgo an extra $25.37 if you closed your CD six months before the term ends. And obviously, an earlier withdrawal would cost you even more.

Though rare, it's possible you could even forfeit some of your principal if your penalty is greater than the interest payments you've received thus far. But this usually only happens if you withdraw your money within a few days or a month after depositing it.  

When should you close a CD early?

When deciding whether it's worth closing a CD early, ask yourself if the consequences of doing so are worse than the consequences of not doing so.

Say you decide you want to go on a vacation or buy yourself something special, but your savings is tied up in a CD. You could withdraw the funds early, pay the penalty, and spend your money. But this might not provide any real long-term value for you. You might even regret the decision later. It's your call, but for at least some people, this wouldn't be a good reason to close a CD early.

On the other hand, if you were a few days away from falling behind on your rent and you found yourself in a financial bind where the only money you have is in your CD, closing it could save you some major financial stress. Paying a small penalty in this case is probably worth it.

You might also decide to close your old CD if rates on new CDs rise sharply. If you've locked in a low interest rate, you might earn a lot less by sticking with your current CD than you could by closing your old CD, paying the penalty, and moving your savings to a new CD with a much better rate. Going back to our example from above, if it will cost you $37 to close your current CD -- $12 for the early withdrawal penalty and $25 in lost interest payments -- and you'll believe you'll more than make up for that by switching to a new CD, switching is probably the way to go.

If you're not sure how much your early withdrawal could cost you, reach out to your current bank for assistance. Then, compare this to what you could earn with a new CD to figure out which option makes the most sense to you.

Or if you'd rather not worry about early withdrawal penalties at all, you could keep your cash in a high-yield savings account instead. These help you grow your wealth while leaving your money accessible. But their interest rates aren't locked in like a CD's interest rate. This is a double-edged sword. It means rates can rise or fall, making actual earnings over time tough to estimate. Still, many prefer to keep their cash where they can access it as needed, even if it means earning a little less.