Bump-Up CDs

More and more banks are offering non-traditional features on the “plain-vanilla” CD. One of those features that you may have heard of is called a “bump-up CD.”

What’s a bump-up CD? It’s a special kind of certificate of deposit that allows you to take advantage of rising interest rates in the middle of your CD term. For example, say you bought a two year CD when interest rates were not great. If, six months later, your bank is offering a higher interest rate, you can “bump-up” your rate to the higher interest rate and take advantage of the best CD rates the bank has to offer.

Most banks only allow you to take advantage of the bump-up feature once, or at most twice, during the term of the CD. So if you are considering a bump-up CD, make sure you know how many times you will be allowed to “bump-up” the interest rate. Some institutions may also require you to extend the term of your CD at the time you bump the interest rate. You should always check with your financial institution to see what special circumstances might apply to you.

While the bump-up feature sounds great in theory, in practice, bump-up CDs rarely offer the best CD rates to begin with. For example, a bank will often offer a two year bump-up CD at a lower interest than the comparable fixed rate two year CD. The bump-up may be a quarter point, or even half a point lower than the fixed rate of interest. In that case, you would need to see an interest rate rise of over half a percent to make up the difference and make choosing the rate bump worthwhile. So essentially, when you choose a bump-up CD, you are gambling on the rate trend and the expectation that bank rates will go up over the course of your CD term. Of course, if interest rates go down, your rate of interest will remain the same – but you would get that anyway with the fixed rate CD interest.

Before you choose a bump-up CD, make sure you have a good understanding of where interest rates are headed and don’t just bank on hopes for the future. You may be missing out on the best CD rates your bank has available.