Should You Cash In Your CD to Avoid Credit Card Debt?

When you put your money into a certificate of deposit (CD), you agree not to pull it out until the CD matures. In exchange for the bank guaranteeing your interest rate, you must promise to pay a penalty if you cash in the CD early.

In most cases, avoiding that penalty is best, so you don't lose your investment gains or even risk losing some of the money that you put into the CD. But there are exceptions to this rule.

If you're in a situation where you have a pressing expense you can't cover with cash and are faced with a choice between putting it on a credit card and cashing in your CD early, you'll have a difficult decision to make.

Here's how you can decide whether cashing in your CD to avoid credit card debt makes sense.

The case for cashing in your CD

Credit cards, in general, charge very high interest rates. The average rate card issues charged as of February 2024 was 21.59%.

CD penalties, on the other hand, vary depending on your situation. Federal law sets minimum penalties, but there are no maximum penalties, and the fees are sometimes pretty hefty. For example, you might end up owing 90 or 180 days of simple interest on the money you withdraw early.

While that's a big hit, the cost of early withdrawal from a CD isn't going to be as high as the interest on your card if you're going to take a while to pay off what you owe. Plus, if you get yourself into credit card debt, this can leave you with less income going forward as you make the payments. You may have less to invest in the future. This can hurt your ability to accomplish long-term financial goals.

To avoid paying these high credit card interest charges and limiting your future options, it may be worth taking the one-time hit of the CD penalty to cover the pressing expense.

The case against cashing in your CDs

While there's a solid argument to make for cashing in your CD early, there are also some reasons not to do it.

For one thing, you aren't just losing the money you pay for the penalty; you're also losing any future returns you would have made on the invested funds. Say you have a 5-year CD paying a really great rate and you cash it in to cover credit card debt now. You'll lose that rate

and may not be able to buy a CD with a similar yield when you're ready to invest again in the future. You'll lose all the gains you would have earned on the CD over time.

You may also have other options to avoid credit card interest besides raiding your investment. For example, there are credit cards that offer a 0% promotional APR on purchases made within the first 12 months of opening them. If you can qualify for one, you may be better off opening a new card and paying off your purchase over time with no interest rather than cashing your CD in -- as long as you're confident that you can pay off the balance in the time given.

The bottom line is, there are disadvantages to cashing in a CD, so it's not an easy call to do it just to avoid debt. You should look into all your options before you act. And you never want to cash in a CD or put something on your credit cards that you can't pay off if it's not an absolutely essential purchase. So unless you have a pressing expense to cover, try your best to save for a purchase first instead of making either of those two moves.