Bump-Up CDs: How To Boost Your Savings With Flexible Interest Rates
With interest rates higher than they have been in 40 years, it may be a good time to consider investing in a certificate of deposit, or CDs. While most CDs offer fixed rates, there are some flexible CD options to choose from.
Bump-Up CDs offer flexibility by allowing you to adjust your interest rate during the term. You can opt for one or more rate changes, which is beneficial if higher rates become available. However, the initial rates may not always be the most competitive.
Read on to learn how Bump-Up CDs operate and whether they might be the right investment option for you.
What Is a Bump-Up CD?
A bump-up CD is a fixed-rate certificate of deposit that allows you to increase your interest rate during the term. Unlike most fixed-rate CDs, which don’t allow any changes to the rate during the term period, bump-up CDs allow you to lock in a higher rate at least once during the term.
Bump-up CDs are ideal in rising interest rate environments, allowing you to lock in your CD at today’s rate and take advantage of increased rates in the future.
Key Features of Bump-Up CDs
Bump-Up CDs are designed to attract investors by offering the flexibility to adjust the interest rate if rates rise in the future. This allows you to open a CD now without being stuck with a lower rate. There are two key features to consider:
No cost for a rate increase. Bump-up CDs allow you to lock in a higher interest rate during your term at no additional cost. If rates jump, you can lock in that newer rate for the remainder of your CD term without paying any fees.
One or more rate increases are allowed. Most bump-up CDs offer a single rate increase for the duration of your CD term, but longer-term CDs may allow more than one rate increase. This means you may be able to lock in multiple rate increases over your CD term.
How Do Bump-Up CDs Work?
Bump-Up CDs work much like traditional CDs, with a required minimum deposit and a fixed term length. But after you lock your money up in a bump-up CD, you can choose to “bump” your rate if the CD rates increase. This locks in your CD interest rate at a new, higher rate for the remainder of the CD term.
There are two main requirements for bumping up your CD rate:
The rates must have increased on a fixed-rate CD with the same term length as yours. For example, if you selected a five-year Bump-Up CD, the interest rates must have risen on a five-year fixed-rate CD in order to take advantage of a rate increase.
You must request a bump, and your bank or financial institution that holds the bump-up CD must approve it to lock in your new rate.
Due to their flexibility, Bump-Up CDs may offer lower initial rates compared to similar fixed-rate CDs. However, like traditional CDs, they still carry early withdrawal penalties.
Benefits of Bump-Up CDs
Here are some key advantages to consider when deciding between a Bump-Up CD and other types of CDs:
You can lock in higher rates in the future. If you’re uncertain about future interest rates, a Bump-Up CD offers some protection. You can lock in a fixed rate and term now, with the option to increase your rate if rates rise later on.
Some Bump-Up CDs offer multiple rate increases. Depending on the bump-up CD chosen and term length, you may be able to lock in multiple rate increases during your term.
There are no fees to increase rates. Bump-up CDs build in the ability to increase your rate without having to pay any fees or penalties and without the need to remove your money and open a new CD.
Drawbacks of Bump-Up CDs
Bump-up CDs give you a guaranteed rate and the ability to increase your rate during your term, but they aren’t for everyone. Here are a few downsides to consider:
You’ll likely see lower initial rates. Bump-up CDs often come with a lower initial interest rate than traditional CDs, making them less attractive.
They won’t offer high returns when rates are dropping. If you think interest rates are stable or may be dropping in the future, a bump-up CD won’t help you get better returns. You can only ‘bump’ your interest rate if rates increase.
There are early withdrawal penalties. Like traditional CDs, bump-up CDs also have early withdrawal penalties if you withdraw your funds before the end of your CD term. Withdrawing too soon can cost you months of interest or even result in a financial loss due to penalties.
Comparing Bump-Up CDs to Other Investment Options
Bump-up CDs allow you to lock in a fixed interest rate with the option to increase it at no additional cost in the future. Here’s how bump-up CDs compare to other types of investments:
Traditional CDs vs. Bump-Up CDs
Traditional CDs offer a fixed interest rate and various term lengths. You can’t change your interest rate during your term, but traditional CDs usually offer higher initial rates than a Bump-Up CD. If you don’t expect rates to keep rising, locking in a traditional CD at a high rate can be a better investment than a Bump-up CD.
Bump-Up CDs vs. Savings Accounts
Bump-up CDs offer high interest rates with the ability to increase your rate during your CD term. Savings accounts (including high-yield savings accounts) offer a variable interest rate that can change at any time. Savings accounts are more liquid, though, and you can access your money at any time without penalty. Bump-up CDs lock your funds in for a fixed length of time and charge penalties for withdrawing funds early.
Bump-Up CDs vs. Market-Linked CDs
Bump-up CDs offer a fixed interest rate and set term length, but you can increase your interest rate at least once during your term if rates increase. Market-linked CDs offer potentially higher returns linked to a market index or fund, but there are drawbacks. While bump-up CDs give a guaranteed rate of return, market-linked CDs may have no return at all, and the upside is capped. Plus market-linked CDs may come with high fees and stiff penalties.
When To Consider a Bump-Up CD
You should consider a bump-up CD if you are in a rising-rate environment and expect interest rates on CDs to continue going up. This lets you lock in a solid interest rate now, with the ability to take advantage of at least one rate increase in the future.
Bump-up CDs may also make sense if you are looking for a higher rate on your fixed-income investments but want more flexibility than a traditional CD.
How To Choose the Best Bump-Up CD
To choose the best bump-up CD, you’ll first want to find a bank that is reputable and offers multiple options for bump-up CDs. Find one that has a high interest rate and term length that you can stick to. Remember, if you withdraw funds early, you’ll be penalized.
Finally, make sure you can meet the minimum deposit requirement and lock your funds away for the term you choose. And keep an eye on rates so that you can lock in a higher rate in the future.
How To Maximize Returns With Bump-Up CDs
To maximize returns on your bump-up CD, you’ll first want to choose one that has a high rate to begin with. Since many bump-up CDs offer lower rates than traditional CDs, try finding one with a high initial rate so that you can still earn interest even if rates never increase.
Next, you’ll want to only invest in bump-up CDs if you expect rates to increase. It may not make sense to invest in a bump-up CD if rates are dropping, as you’ll never be able to lock in a higher rate.
Finally, make sure you don’t need access to the funds in your bump-up CD in the near future because you’ll pay an early withdrawal penalty if you access funds early.
Common Misconceptions About Bump-Up CDs
Bump-up CDs allow you to increase your interest rate at least once during your CD term, but they may not be as flexible as you think. You can’t bump your rate at any time — you have to apply for a bump and your bank must approve it.
Plus, you can only get a rate bump if your exact term length CD has an increased rate at your bank. If you see a rate increase for another term-length CD or at another bank, this doesn’t mean you can bump your rate.
FAQ
What is the difference between a CD and a bump up CD?
A traditional CD offers a fixed interest rate and term, while a bump-up CD lets you increase your rate at least once during your CD term. Traditional CDs will often carry better rates up-front.
Is a rate bump CD worth it?
A bump-up CD is only worth it if interest rates are increasing, and you expect them to continue to increase. Otherwise, you may not be able to bump your rate at all during your CD term—and you’ll lock in a lower rate than a traditional CD.
What is the minimum deposit for a bump up CD?
Bump-up CDs minimum deposits vary by financial institution, but many require at least $1,000 to open. Minimums may be as low as $500, but make sure to compare rates between banks before choosing one with a lower minimum.
This article originally appeared on GOBankingRates.com: Bump-Up CDs: How To Boost Your Savings With Flexible Interest Rates
