Certificates of deposit (CDs) can be a useful tool for building your savings plan. It’s possible to find CDs that offer competitive rates, allowing you to grow your savings faster than you might with a traditional savings or money market account.
One thing to keep in mind is that CDs aren’t all the same. Bump-up CDs are a specific type of savings option that could help you increase the annual percentage yield you earn over time. This type of CD can be useful in a changing interest rate environment.
Here’s a closer look at how bump-up CDs work and what to know about using them to save money.
What Is a Bump-Up CD?
A bump-up CD, sometimes called a raise-your-rate CD, is a certificate of deposit account that gives you the option to “bump up,” or increase, your APY during the CD’s maturity term. You can ask the bank to raise the APY on your CD before it matures to take advantage of rising interest rates.
A bump-up CD is different from a step-up CD, even though they sound similar. With a step-up CD, the bank raises your APY automatically at different intervals throughout the CD term. This type of CD is less common than a bump-up CD, although some banks do offer them.
How a Bump-Up CD Works
A bump-up CD can be opened at a traditional bank, an online bank or credit union. When you deposit money into this kind of CD, the bank assigns you an initial APY. As the CD’s maturity term progresses, you can ask the bank to increase your APY if rates rise.
For example, say you open a two-year CD with an APY of 1.25%. Halfway through the CD’s term, interest rates rise and the bank is now paying 1.60% APY on the same type of CD. You could ask the bank to give you the higher rate for the remaining year of your CD term.
What’s important to note is that bump-up CDs typically only allow one increase per term. But some banks make an exception for longer CD terms. Ally Bank, for instance, allows you to bump up your APY two times if you have a four-year CD account.
Terms can vary by bank, but it’s typical to find bump-up CDs with terms ranging from two to four years. How much of a bump you can receive depends on how much the APY increases on your bank’s CDs in the future. It’s also possible the bank or credit union may cap you at a certain APY limit when requesting a bump.
Discover® 9-Month Certificate of Deposit term
Annual Percentage Yield
4.25%
Minimum Deposit Requirement
$2,500
4.25%
$2,500
Advantages of Bump-Up CDs
The main benefit of using a bump-up CD is the option to raise your APY during the maturity term.
Interest rates aren’t set in stone and banks can increase or decrease the APY they pay on deposit accounts over time. These APY changes are typically tied to Federal Reserve interest rate movements. When the Fed cuts rates, banks typically reduce the APY they pay to savers. When rates are rising, banks tend to pay out higher yields to savers.
Opening a bump-up CD can allow you to take advantage of upward movements where interest rates are concerned. With most CDs, your APY is locked in for the entire term. But opening a bump-up CD allows you to take advantage of higher rates without having to wait for your CD to mature.
This can help with growing your money faster, which may be important to you if you’re using a CD for a big savings goal, such as a down payment on a home. Even small increases in your APY could make a difference over time.
Going back to the previous example, say you opened your CD with $10,000. If you earn 1.25% APY on that CD for an entire two-year term, you’d have $10,251.56 in savings once it matures. But if you earn 1.25% APY for the first 12 months and 1.60% APY for the second 12 months, you’d end up with $10,287 instead. Your savings could grow even more if rates experience a significant increase.
With other types of CDs, you don’t have the option to cash in on higher rates. While you could withdraw money from a regular CD before its maturity term and open a new one at a higher APY, that strategy can have consequences. Many banks charge an early withdrawal penalty—usually either a flat fee or a percentage of the interest earned—for closing out a CD before it matures. Bump-up CDs offer a work-around so you can avoid the penalty without missing out on higher rates.
Disadvantages of Bump-Up CDs
There are a couple of things to note about using bump-up CDs to try and get the best interest rates.
First, many banks offer a lower initial APY for bump-up CDs compared to other types of CDs. It’s the bank’s way of offsetting any higher APY they may need to pay down the line if you decide to bump your rate. So, even if you raise your rate at some point during the CD term, you may still earn more interest with a regular CD.
The other thing to keep in mind is that if rates don’t rise during the CD term, you’ll be locked in at a lower APY. Opening bump-up CDs can be tricky because you have to be aware of the interest rate environment and forecast. Early in 2020, for instance, the Federal Reserve cut the federal funds rate to nearly zero, leading banks to reduce yields for deposit accounts. Opening a bump-up CD at that time meant a long wait to see rates rise again, as COVID-19-related economic uncertainty continued for two years before the Fed began to hike rates.
Even when rates are on the rise, it can be difficult to know exactly when to time an APY bump. If you ask for an increase too soon, you could end up watching rates go even higher. Wait too long, and you may not have enough time left in your CD term to make the most of an APY increase.
Consider a CD Ladder as a Work-Around
Bump-up CDs can help you increase your APY over time, but it can be difficult to predict which way rates will move. Another way to take advantage of higher rates is to create a CD ladder.
A CD ladder is essentially a collection of CDs that have different maturity terms and earn different APYs. The idea is that by opening multiple CDs with varying terms, you can have more convenient access to your money—your next maturity date is always just around the corner. As these CDs mature, you can roll them over into new CDs to capitalize on higher rates, or you can cash them out if you need the money.
For example, you might create a CD ladder that looks like this:
- 6-month CD at 1.00%
- 9-month CD at 2.40%
- 12-month CD at 3.50%
- 18-month CD at 4.20%
Generally, longer CD terms offer higher APYs, although that’s not always the case. Also, keep an eye out for banks offering special CD promotions that pay higher rates for shorter-term CDs.
A CD ladder could help you get the best rates on CD savings without having to ask for a bump. And regularly maturing CDs can boost your financial liquidity, helping you to avoid excess withdrawal fees in case you need access to some of your savings. Plus, if you don’t need your savings right away, you can continue rolling the money over into new CDs. Just make sure to research rates at your current bank to get the best deal on a new CD.
How to Open a Bump-Up CD Account
Opening a bump-up CD starts with comparing CD accounts at different banks. As you research bump-up CDs, consider the following:
- Maturity term
- Bump-up frequency
- Initial APY
- Minimum deposit to open
- Early withdrawal rules and fees
Banks can differ in how they structure bump-up CDs. For the best rates, you may want to check out online banks. Compared to traditional brick-and-mortar banks, online banks typically offer better APYs and fewer fees for CD savers.
Once your bump-up CD account is open, keep a close eye on what’s happening with interest rates. If you see rates begin to trend upward, you might want to think about bumping your APY. Just consider what the rate forecast looks like for the rest of your CD term. And remember, you’ll have to reach out to your bank and ask for the APY increase if you want it. Unless you have a step-up CD, your bank won’t raise your rate automatically.
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