Author: Heather Vale
July 25, 2023
Topics:
InvestmentsYou may know what a certificate of deposit (CD) is, but the bump-up CD is unique. Here’s how it works and what you need to understand before considering one.
A certificate of deposit (CD) is a type of investment product that pays you a relatively high interest rate as long as you commit to keeping your money in the CD for a set period of time, known as the term. Throughout the term, the CD grows, earns interest, and “matures.” At the final maturity date, you can withdraw your funds (including accrued interest) or roll it over into a new CD. If you take out your money before it matures, you’ll usually have to pay an early withdrawal penalty.
It seems simple enough, but there are also different types of CDs you need to know about before choosing to invest in one. For example, you could get a regular CD, a high-yield jumbo CD, or a bump-up CD (also called a step-up CD, jump-up CD, or trade-up CD). This last type is unique and more involved than the others. Let’s look at how a bump-up CD stands out by letting you respond to rising interest rates.
Bump-up CDs are so named because you get to “bump up” your interest rate, usually one time during the term. You’re typically not limited on when you make that bump, but you’ll want to pull the trigger when you think interest rates are at the peak to take advantage of the higher interest rate.
Compared to a standard savings account, most CDs provide a higher yield. In fact, your CD’s annual percentage yield (APY), or the interest rate you earn, is typically among the highest available when you open it. The problem is that interest rates change, and most CDs require you to lock in your money for months or years. If the interest rate goes up during your term, you don’t get the higher rate.
But a bump-up CD solves that dilemma by allowing you to opt for a rate increase if the offered APY goes up. You just have to be strategic in your timing since you only get one chance — or sometimes two, on a longer term. Usually you select the bump-up option online through your CD account, but in some cases you might need to call the bank.
Let’s say you get a 24-month bump-up CD with an option to increase your rate one time only. You start with an APY of 4%, but market interest rates rise, and six months later the CD rate is 4.5%. You can choose to do your bump-up then, and you’ll have the 4.5% rate for the rest of the term, which is 18 months. Even if interest rates drop again, you’re locked in at the higher rate.
But what if interest rates go up further? If you’ve already chosen the bump, you’ll stay at that rate and don’t have the opportunity to increase it again — but if you chose to wait, you can do your bump now and lock in the higher return. It’s like the internet meme that says, “You can only pick one. Choose wisely.” This is a bit of a guessing game, which requires studying the market and predicting future conditions to optimally pull it off. But if you don’t want to be stuck with one rate for several years, it might be the perfect choice.
The obvious advantage to bump-up CDs is the ability to raise your rate during the term, but there are other benefits too.
Even though you get to bump up your rate during the term, you’ll often start with a lower rate than fixed-rate high-yield CDs. There are a few other drawbacks as well.
CDs and similar savings products come in several varieties, each with their own pros and cons.
Bump-up CDs offer advantages over other types of CDs, but there are disadvantages as well. If you’d like to explore whether it’s right for you, take a look at Credit One Bank’s Bump-Up Jumbo CD.
About the author:
Heather ValeFor over a quarter of a century, Heather has been working as a journalist in all media: TV, radio, print, and online. After establishing her career in Toronto, she has been living, working, and playing in Las Vegas for the past decade. She loves pulling apart complicated topics to make them simple, fun, and easy to understand, especially in the business and financial niches. But she also enjoys writing about the personal side of life, including success, relationships, families, and pets. She approaches everything from a yin-yang perspective, so her passion for wordplay and entertaining metaphors is always balanced with an intense (and some would say annoying) focus on facts and accuracy.
This material is for informational purposes only and is not intended to replace the advice of a qualified tax advisor, attorney or financial advisor. Readers should consult with their own tax advisor, attorney or financial advisor with regard to their personal situations.