Beware of the Auto Renewal Feature

Robber Banks Steal Income

In my last post about CDs I discussed my CD purchases on the Fidelity Investments website. Fidelity offers a host of good CD investments, and you can create a CD ladder or use one prefabricated for your use. However, regardless of where you buy your CD’s, be wary of the automatic renewal feature. Some banks are sneaking villains.

Wall Street Journal Article

A recent WSJ article was titled “How High-Yield CDs Turn Into 0.05% CDs While You’re Not Looking.” It was written by Imani Moise and published March 30, 2024.

Here is how the article started: “John Furlong signed up for a certificate of deposit last year that paid 3.85%. When he checked his account in February, he was surprised to find the bank was only paying him 0.05%. The 62-year-old construction manager thought there was a mistake. Then an employee at his branch in Henderson, Nev., told him that his $50,000 CD had matured and automatically rolled into a new one that was paying a lower rate. The only way to get out of the low-rate CD was to pay an early withdrawal fee. ‘It’s fool’s gold,’ he said. His money is earning $2.15 a month until the new CD matures in October, instead of the $160 he had been collecting.”

Bad Rates from a Bad Bank

First of all, I think it is generally poor investment planning to accept a CD that pays less than 4%. The article says, “John Furlong signed up for a certificate of deposit last year that paid 3.85%.” Sadly, when the $50K CD was renewed John’s bank did him a great disservice. Therefore, it is usually unwise to automatically renew a CD unless your bank has a provision to notify you of the new rate before it automatically renews. John went from earning $160 per month in interest to $2.15 per month. The bank is delighted. John is very disappointed.

Bankrate Comparisons

In this first image from Bankrate you can see that two banks are offering disgusting rates on 1-year CDs. The banks in question are Bank of America and Chase Bank. Run from these banks and find ones that are better able to serve their customers.

The second image shows more rational rates from Lending Club, Capitol One, and Barclays. All are FDIC member banks. But you don’t have to go to these banks to get good rates. Rather, go to Fidelity Investments and buy your CDs online. Just remember to say “NO” to auto renew.

Here are My CD Requirements

When I purchase a CD, I want the coupon (interest rate) to be greater than the average yield of the investments in my account. Currently, my average yield is 4.7% for my traditional IRA and ROTH IRA combined. Therefore, unless I have a good reason to hold cash (and I do), I want my yield to be around five percent.

Secondly, I want monthly interest, not interest at maturity. This is the “coupon frequency.” I bought 10 CDs from each bank, so I purchased a total of 30 CDs worth $30,000. There is nothing wrong with a CD that pays at maturity, but if you have a choice, pick one that pays monthly.

Thirdly, the CD must not be “callable.” I want call protection. This means the bank cannot close out the CD before the end of the period.

Finally, the CDs I buy should have different maturities. In this case I purchased CDs that mature in 4 months, 5 months, and 9 months. In addition, when I buy a CD, I say “No” to auto-roll. I don’t want the CD automatically renewed at the current interest rate. I don’t want to be like John.

The following link talks about the automatic renewals as well: Deposit Accounts.