What is a callable CD?

By Sabrina Karl

Almost all certificates of deposit can be cashed out early if you need your funds before maturity, though you’ll pay a penalty for doing so. But there is a special class of CDs that allow the bank to cash you out early, rather than let you keep the CD until it matures.


The name of these certificates is callable CDs, given that they can be “called early” by the financial institution. Generally, they will be characterized as having a maturity date, just like a traditional CD, and then also a callable date.


For instance, you might see a 2-year certificate carrying a callable date of six months. That means that six months after opening the CD, the bank has the option to cash it out early. If they don’t, they’ll have another chance to call it six months later.


The benefit is that callable CDs typically pay higher interest rates than standard CDs, to compensate for the risk of your earning period ending prematurely. In addition, banks will agree to pay you a premium on the face value of your principal if they call the CD early. For instance, you may get back 102 or 103 percent of your principal, plus any accrued interest.


The downside is that you can’t rely on earning the fixed interest rate for the full maturity period. Not only that, but callable CDs are typically terminated early when rates are dropping. So if your CD is called, you’ll likely be left with cash that can only be invested at today’s lower interest rates.


Callable CDs can make sense for money you won’t mind getting back early, in exchange for upside potential on the rate. But when you prefer to lock in a top rate for as long as possible, non-callable CDs will serve you better.