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What Are Bump-Up Certificates of Deposit? All You Need to Know

By Laurel Tincher · September 18, 2022 · 6 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Are Bump-Up Certificates of Deposit? All You Need to Know

A bump up certificate of deposit (CD), also known as a step-up CD or raise-your-rate CD, is a type of savings account that allows the account owner to “bump up” or increase the interest rate they earn if rates increase during the investment term. Typically one bump up is allowed, and the other terms of the CD remain the same after that.

The initial interest rate of a bump up CD is lower than other types of CDs, but it comes with the opportunity to earn a higher rate.

In this article, we will go over how bump-up CDs work, their advantages and disadvantages, and how to get started earning with this type of savings account.

How a Bump-Up CD Works

Bump-up certificates of deposit are similar to ordinary CDs in most ways.

If an investor buys into a bump-up CD account, it will start out with a certain interest rate. The investor will be required to deposit a certain amount of money to open the account and agree to keep it there for a specified period.

If, during the term of the CD, the issuer’s interest rates increase, the investor can ask the issuing bank to raise the interest rate they earn on their CD. This is quite different from a standard savings account, where the investor has no control over the interest rate. So if the initial rate is 2.0%, and during the maturity term the rate increases to 3.0%, the account holder can request a bump up to 3.0%.

If the interest rate drops to 2.5% sometime after that, the investor is protected and keeps their bump up to 3%.

Step-up CDs are similar, but the difference is the bank will automatically raise the interest rate throughout the term of the CD with a step-up CD. With a bump-up CD the rate is not automatically increased.

Usually, interest rates can only be increased one time during a CD term, but some banks do offer multiple bump-ups if the term of the CD is long. Also important to note, is that some banks put a cap on how high the interest rate can be bumped on a CD. So if interest rates go up a lot, CD owners may not be able to fully take advantage. Generally, bump-up CDs have a two- to four-year term. Like a regular CD, these accounts are FDIC-insured.

Recommended: How to Invest in CDs

Bump-Up CDs: Real World Example

Let’s say an investor opens a bump-up CD with a two-year term and an interest rate of 1.25%. One year into the CD term, the issuing bank’s interest rates rise, and they now offer 1.60% on the same type of CD. The investor can request that the interest rate on their CD be increased to the new rate of 1.60% for the second year of its term.

In this example, let’s say the investor deposited $10,000 into the CD when they opened it. If they had earned 1.25% on their money for the full two-year term, by the end of the term they would have $10,251.56 at the maturity date. However, if they earn 1.25% for the first year and 1.6% for the second year, at the maturity date they would have $10,285.00.

Earning an additional $34 may not seem like a significant difference, but it’s one of the easier and safer ways to have your money earn money.

Advantages of Bump-Up CDs

There are advantages to buying bump-up CDs, including:

•   Ability to raise the CD’s interest rate during its maturity term instead of having to wait or open a new CD

•  Take advantage of new, higher rates without any early withdrawal penalties

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Disadvantages of Bump-Up CDs

Although there are advantages to bump-up CDs, they come with some downsides as well:

•  Since bump-up CDs typically only allow one bump up, they are recommended for investors who have a deep understanding of the interest-rate system and what might happen during their investment term.

•  The initial interest rate on bump-up CDs tends to be lower than other types of CDs. So even though there is the ability to raise the rate later, a traditional certificate of deposit may still earn more interest since it likely starts at a higher rate.

•  Interest rates may not go up during the CD term, locking the investor into the initial lower rate.

•  If interest rates do start to increase, timing the bump-up on a CD can be challenging. By bumping up earlier you can take advantage of a higher interest rate for more time, but you could miss out on an even higher rate that might come later.

How to Open a Bump-Up CD

Banks and credit unions offer bump-up CDs. To open one, an investor deposits a certain amount, and the CD has a particular starting interest rate and term. Once it’s open the account owner can contact the issuing bank or credit union to increase the rate throughout the CD term.

The terms to consider when opening a CD include:

•  Maturity term

•  Bump up frequency

•  nitial interest rate

•  Minimum deposit to open the account

•  Early withdrawal rules and penalties

•  Fees

Alternatives to Bump-Up CDs

There are several other types of interest-bearing deposit accounts and CD investment strategies that investors may want to consider:

Traditional CD

A traditional CD has a fixed interest rate over the course of its maturity term. There are some advantages to traditional CDs and they often earn higher rates than bump-up CDs.

CD Laddering

Since it can be hard to predict what will happen with interest rates in the future, another investing strategy is to create a CD ladder.

A CD ladder is a portfolio of CDs that each have a different interest rate and maturity term. This strategy provides an investor with a range of interest rates, allowing them to take advantage of changes in the market, and each time one of their CDs matures they have some funds to put into a new one or cash out. Usually, a longer-term CD will have a higher rate, but by opening some shorter-term CDs as well investors can put their money into new ones if interest rates increase rather than opening a bump-up CD.

Here is an example of a CD ladder:

•  6-month CD at 0.40%

•  9-month CD at 0.50%

•  12-month CD at 0.80%

•  18-month CD at 0.90%

Step-Up CD

Similar to a bump-up CD, step-up CDs allow investors to take advantage of rising interest rates. The difference is with a step-up CD the issuer automatically raises the interest rates at certain intervals throughout the CD term.

The Takeaway

Bump-up CDs can be a good way to take advantage of rising interest rates. They are safe investments with more flexibility than a traditional CD, but they don’t necessarily earn more interest. Understanding interest rates is complicated, so bump-up CDs are generally only recommended for experienced investors.
If you want to bump up your savings, one smart option is to open a SoFi Checking and Savings. You can get started with just a few clicks online, or on your phone, and this all-in-one account has no account fees or overdraft fees. Even better, you can qualify to earn a competitive APY by using direct deposit – and you can set up automated goals to grow your savings steadily over time.

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What is a 12-month bump CD?

A 12 month bump CD is a certificate of deposit savings account that earns a certain amount of interest over the course of one year. If interest rates rise during that year the account owner can request that the interest rate their CD earns be increased to the new rate.

How do bump-rate CDs work?

Bump-rate CDs are similar to traditional CDs, but they allow the owner to request an interest rate increase one time during their maturity term if market interest rates go up.

Photo credit: iStock/sihuo0860371

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