What is a bump-up CD?

Certificates of deposit (CDs) are popular for offering higher interest rates than regular savings accounts. But what if the CD rates go up right after you lock yours in? Bump-up CDs offer a way of getting round this, giving you the option of requesting a higher rate during your term.

In this article, we’ll discuss how bump-up CDs typically work, their pros and cons, and whether they are the best option for you.

When you see “bump-up” on a certificate of deposit (CD), it means that you have the opportunity to increase your interest rate at least once during the CD’s term. However, this option is only available if your bank raises rates for CDs with the same term as yours.

Also known as a “raise your rate CD” or “bump-rate CD”, the variable interest rate is what sets it apart from traditional CD accounts that lock in a fixed rate for the entire term. Bump-up certificates of deposit allow you to capitalize on potentially higher rates without having to open a new account. They offer an element of flexibility that doesn’t often feature in the typically fixed world of CDs.

With bump-up CDs, banks usually let you request a rate increase once, although you may be able to ask more than once if the CD term is longer, per your specific product’s terms. The CD then continues to mature as usual. The key thing is that the rate increase only happens if the bank raises rates for new CDs with the same term as yours.

Unlike traditional CDs, bump-up CDs often start with a lower annual percentage yield (APY), to factor in the potential rate increase later in the CD term. This means you’re essentially sacrificing a higher initial rate for the flexibility to adjust your rate if interest rates rise later on.

It’s not an automatic process. The bank or credit union must raise rates for their new CDs first, and only then can you request a bump.

Timing also plays a role — if CD rates go up early in your term, you’ll benefit from those increased returns for a longer period. But if they rise later on, you might miss out on the full advantage. Ultimately, there’s no guarantee they will actually increase.

As with any CD, your money is locked in for a set period. And if you need to access your money before the maturity date, you could face penalties.

It can help to illustrate how a bump-up certificate of deposit works with an example.

Say you open a 24-month bump-up CD in October 2024 with a bank offering 3.00% APY. You deposit $10,000 to save for a goal two years down the road.

Year 1:

For the first 12 months, your CD earns 3.00% APY.

Interest earned: $10,000 × 0.03 = $300.

Year 2:

Now, your account would have $10,300, including the accrued interest. At this point, interest rates increase to 4.00%, so you take advantage of the bump-up option to increase your own CD rate.

Interest earned: $10,300 × 0.04 = $412.

Total earnings:

After 24 months, you’ve earned a total of $712 in interest. Because the interest rates increased halfway through, you gained an additional $103 than if you hadn’t taken advantage of this option.

Bump-up CDs are offered by both banks and credit unions and are typically advertised alongside their traditional CD offerings. If your specific bank or credit union doesn’t offer bump-up CDs, you may be able to find an institution that does and open an account with them specifically.

There are generally fewer options to choose from when it comes to bump-up CD accounts. You may be able to benefit from wider variety by exploring other savings products.

The main attraction with bump-up certificates of deposit is the prospect of increasing the interest you earn on your savings. But you might be wondering: is that flexibility really worth it? Since most of the options have terms of two or three years and only allow one rate increase, the chances of earning more might feel limited in practice.

Interest rates can move in either direction over time. While rates may rise, they can also fall. If they drop, you could end up with a CD that pays less than other options for a similar term. Because of this uncertainty, bump-up CDs may be best suited for savers who keep an eye on the economy and interest rate trends.

A central downside is that the initial APY (before a rate increase) is usually lower than what you’d find on traditional CDs. That means it’s worth doing your homework and making sure you’re getting the best rates possible.

To help with that, Raisin offers a free CD calculator. Simply input your deposit, monthly contributions, and the APY to compare your potential earnings on a bump-up CD to other high-yield options.

Bump-up CDs aren’t the only way to add flexibility to your savings. CD laddering is a do-it-yourself technique that lets you make the most of potentially rising rates in the future, while also giving you easier access to your cash. Plus, you can easily customize it to suit your particular financial goals.

With a CD ladder, instead of parking all your savings in one long-term CD, you invest them across several shorter- and longer-term CDs. The idea is that you can lock in higher rates with the longer-term CDs while still having money available in shorter-term CDs that mature sooner. When a CD reaches maturity, you can either withdraw the money or reinvest it to keep your ladder going.

For example, if you have savings of $50,000, you could open four CDs with terms of 3, 6, 9, and 12 months and put $12,500 in each. This way, you have money becoming available throughout the year.

Worried about managing multiple accounts? With Raisin, it’s easy. By opening one free account, you can open and manage all your CDs in one place. We only partner with federally regulated banks and credit unions.

When it comes to CDs and other high-yield savings products, there’s no shortage of options to fit your needs. And, like with bump-rate CDs, you’re not always locked into a single interest rate for years.

Here are a few alternatives you might consider:

• Callable CDs: These CDs offer fixed, premium interest rates for their entire terms. In exchange, the issuing institution has the option to “call,” or redeem, the CD prior to its maturity date.
• Step-up CDs: The interest rate on step-up CDs automatically rises at set intervals during the term, so you don’t have to worry about missing out if rates go up.
• Add-on CDs: Unlike traditional CDs, where you make a one-time deposit, add-on CDs let you contribute additional funds throughout the term. You can keep growing your savings over time without needing to open a new account.
• No-penalty CDs: While you can’t add more to your deposit after opening, no-penalty CDs let you withdraw funds anytime without paying an early withdrawal fee. You get the benefit of a competitive interest rate and access to your money when you need it.
• Treasury bills (T-bills): This is a short-term U.S. government debt instrument, with terms ranging from 4 to 52 weeks. T-bills are sold at a discount to their face value, and usually come in denominations starting at $100.

To make sense of your options beyond bump-up CDs, using a comparison tool can be helpful. Raisin lists its savings accounts by APY, so you can easily compare CD rates and terms. Just enter your deposit amount and maturity, and you’ll see an estimated interest. This makes it easier to choose the best deal without getting lost in the fine print.

There’s no better time to discover how much you could be earning on your savings. On the Raisin marketplace, you can compare competitive rates on fixed-rate CDs, no-penalty CDs, high-yield savings accounts, and money market deposit accounts.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.