Certificates of deposits are some of the safest investments you can make. They are not dependent on the stock market, they are protected by deposit insurance and they have clear terms that you understand going in. A bump-up CD, also known as a step-up CD, has the potential to offer the same high level of stability while also allowing you to take advantage of a rising-rate environment. Let’s take a look at what bump-up CDs are, how they work and if they’re the best option for you.
If you’d like personalized advice on your savings and investment strategy, consider working with a financial advisor.
Bump-Up CD Definition
First, let’s define what a regular CD is. A CD is a savings account that holds your money for an agreed-upon period of time. At the end of that time period, your money is released to you along with an agreed-upon amount of interest. If you withdraw your money before the agreed-upon time is up, you’ll pay a penalty.
To calculate how much interest you could earn with a CD, try using SmartAsset’s CD calculator.
A bump-up CD operates on the same principle, but you have the option to raise the interest rate during the CD’s lifespan — to bump it up, if you will. Some CDs will only offer one opportunity to bump up your rate, while others may have longer lifespans and offer more than one chance to raise it.
A bump-up CD is designed to allow customers to take advantage of rising CD rates without having to cash out their CD, swallow the penalty and put their money back into a new, higher-interest CD. But because of the option to bump up, this kind of CD usually offers a lower starting rate than a traditional CD.
How Does a Bump-Up CD Work?
Let’s look at a simple example of a bump-up CD. You put your money in a bump-up CD with a 24-month maturity date and a starting interest rate of 1.5%. At the 12-month mark, the CD rates at the bank that holds your CD rise to 2%, and you use your bump-up option to raise your rate to 2% for the remaining 12 months.
This simplified example of a bump-up CD shows some of the positives of a bump-up CD: You can get an improved interest rate in one of the safest and most predictable savings vehicles that exist.
Is a Bump-Up CD Right for You?
While a CD is an excellent way to earn interest and a bump-up CD might sound like a great way to maximize your earnings, it might not be the best choice in all scenarios. Let’s take a look at three things to consider before you put your money in a bump-up CD.
The Bottom Line
A bump-up CD can be a great choice in a rising interest rate environment, allowing you to take advantage of a secure savings option while still having the opportunity to bump-up your rate. On the other hand, bump-up CDs can leave you behind if rates continue to rise after your bump-up and have other limitations that might not make them right for everyone.
Tips for Savings
Photo credit: ©iStock/LUHUANFENG, ©iStock/Andrii Dodonov, ©iStock/Kunakorn Rassadornyindee