Bump-Up CDs: What They Are And How They Work

When interest rates rise, Bump Up Certificates of Deposit (CDs) allow savers to benefit from higher yields.

In a still-high interest rate environment, bump-up CDs (sometimes called “rate boost CDs”) give savers the option to increase their CD’s annual percentage yield (APY) without changing the terms of the CD.

Bump-up CDs typically allow for only one interest rate increase during the term, meaning they may be a good fit for investors who know the current interest rate environment and whether rates will go up or down. Some bump-up CDs allow customers to increase their interest rate multiple times.

What is a Bump Up CD?

A CD is a savings account with a set maturity date and interest rate. The interest rate usually remains the same for the life of the CD, but there are options that allow the interest rate to change. Bump-up CDs allow account holders to increase their interest rate while the CD matures.

Like traditional or regular CDs, savers commit to putting money into a bump-up CD for the entire term, which can be several months or years. Most bump-up CDs have a two- or three-year term, giving investors plenty of time to opt into a higher interest rate.

How Bump Up CD works

Because CDs give the holder the right to raise the interest rate, most bump-up CDs have slightly lower interest rates than traditional CDs. The minimum amount required for a bump-up CD also varies by financial institution, but some have a minimum of $500.

Many bump-up CDs allow for a single interest rate increase, but some (especially longer-term) allow for multiple bump-ups. There may be rules about how much you can increase your interest rate at one time. It’s best to check with your financial institution to find out the terms and conditions of your CD.

Also, keep in mind that if you withdraw money from a CD before its maturity date, you could end up paying a penalty unless it’s a no-penalty CD.

Bump-up CD example

For example, let’s say you want to save $10,000 for some home renovations. You don’t expect to need the funds for a few years, but you want to let the money grow safely in the meantime and take advantage of rising interest rates. A bump-up CD with a two-year term is ideal if you don’t expect to need the funds before the term expires.

Now, let’s say you initially invest in a bump-up CD that offers a 4 percent APY. Then, a year later, interest rates rise and the APY on your bump-up CD increases to 4.30 percent. You then take advantage of the one-time bump-up to take advantage of the new, higher interest rate.

If you need the funds during the two-year period, understand what the early withdrawal penalty will be and decide if a bump-up CD is right for you.

Advantages and disadvantages of bump-up CDs

If you’re considering a bump-up CD, here are the costs and benefits.

advantage

Opportunities to take advantage of rising interest rates: The biggest advantage of a bump-up CD is that you can increase your interest rate over the term, so if interest rates rise during the term, you’ll earn more interest faster and by the amount of the increase.

Potentially high returns: Bump-up CDs may start out with a slightly lower interest rate, but with the potential for adjustment, your overall return could be greater.

You don’t need to constantly monitor: Unlike periodically rolling over a short-term CD to get a better interest rate, a bump-up CD allows you to stay in the same term and adjust your interest rate when it’s favorable — or not at all if interest rates drop.

Disadvantages

Low initial rate: Bump-up CDs often start with a lower APY than other types of CDs, and depending on market conditions, a traditional CD may earn you more interest over its entire term than a bump-up CD.

Limited number of bumps: Most bump-up CDs limit the number of times you can adjust your interest rate to one or two times, and if rates continue to rise, changing it too early could mean you miss out on a bigger APY increase.

No auto-adjustment: You need to be proactive in asking for rate increases. If you aren’t paying attention to market rates, you may miss out on opportunities to increase your rates.

Should I buy the Bump Up CD?

Bump-up CDs are the most advantageous in a rising interest rate environment, as they offer the potential to earn more over the term of the CD. While interest rates are expected to fall in the coming months, there is still an opportunity to take advantage of higher interest rates that are well above the national average. However, it is still important to compare your initial CD interest rate offer with other options.

“Just because a CD’s yield increases periodically or offers the option to step up to a higher yield, don’t automatically assume it’s the best option,” says Greg McBride, CFA, chief financial analyst at Bankrate. “Compare the yield you earn up front to the yield of the highest-yielding traditional CD of the same maturity. If you sacrifice too much yield up front, you won’t be able to get it back later in the term,” McBride adds.

Opening a bump-up CD is similar to opening any other type of bank account, but fewer banks offer bump-up CDs. Be sure to find out the details of what your bank offers, including maturity term, bump-up frequency, initial APY, first-time deposit fees, and early withdrawal fees.

Online-only banks will likely offer better interest rates, but if you shop around, you may be able to find better offers from traditional financial institutions. Once you’ve found a bank and account that suits your needs, you’ll need to fill out an application and read the account documents.

Bump Up CD Alternatives

Depending on what you want to get out of your savings, there are a few bump-up CD alternatives you might want to consider.

Conventional CD: Fixed accounts with fixed terms and fixed interest rates. Most banks and credit unions offer CDs with terms that typically range from as short as three months to as long as five years.