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Bump-Up CDs: What Are They & How Do They Work?

Last updated by
Camilla Smoot
Edited by
Sammi Toner
Fact checked by
Andrew Latham

  • Table of Contents

    • Article Summary:

    Bump-up CDs are certificates of deposit that allow you to raise your annual percentage yield once within the term of the CD. While this has the potential to help you earn more interest than you would with a regular CD, knowing when to raise it could be tricky, and many banks offer a low APY with these CDs anyway.

    If you’re looking for an easy and fairly risk-free way to invest your money, look into getting a certificate of deposit. Certificates of deposit (CDs) allow you to set money aside and leave it untouched for a certain amount of time in exchange for a high-interest rate.

    There are a large variety of CDs you can choose from, and today we’ll be talking about a bump-up CD. Bump-up CDs are a great way to take advantage of rising interest rates and have the potential to help you earn more than you would with other CDs. This article will break down everything you need to know about these types of CDs and help you know if they’re right for you.

    How do bump-up CDs work?

    To understand a bump-up certificate, you first need a basic understanding of what an annual percentage yield (APY) is. An APY is the rate of return earned on an investment. A bump-up CD — also called a raise-your-rate CD or rate bump CD — allows you to “bump up” your APY before the maturity date.

    Increasing the APY of a CD can be done without changing the term of the CD. You can open a bump-up CD through online banking, a traditional bank, a credit union, or another financial institution.

    Here’s a step-by-step breakdown of how a raise-your-rate CD works:

    1. A person opens a bump-up certificate of deposit through a financial institution.
    2. The person deposits a certain amount of money into the CD.
    3. After the money is deposited, the institution assigns an APY.
    4. If interest rates rise, you can ask the institution to increase your APY.
    5. The APY rate would rise and stay that amount until the end of the maturity term.

    IMPORTANT! Most bump-up CDs typically only allow you to raise your APY once per term. Some institutions, however, make an exception for longer-term CDs. So for example, if your CD term does not end for six years, you might be allowed to raise your APY twice.

    Pros and cons of a bump-up CD

    The ability to raise your APY as interest rates rise is a definite advantage to using a bump-up CD. But there are some more advantages to a bump-up CD, as well as some traits to be aware of before committing to one.

    WEIGH THE RISKS AND BENEFITS

    Here is a list of the benefits and drawbacks to consider.

    Pros
    • Raise your APY. Of course, the biggest benefit of a bump-up CD is the ability to raise your APY during the CD’s term. Most CDs lock in the same APY for the entire term, but a bump-up CD allows you to take advantage of higher interest rates without having to wait until your CD matures. You can do it sooner and, in some cases, you can do it more than once.
    • Greater earning potential. You have the potential to earn more through a bump-up CD, as you can increase your APY to match the current interest rate. This is a benefit you won’t get through a traditional bank CD or any other CD.
    • Predictable. Interest rates for CDs are fixed, so you know exactly how much you’ll earn during the term of the CD. Even after you raise it, that new amount will be the same until the maturity date. The predictability of bump-up CDs is a definite advantage.
    • Security. The Federal Deposit Insurance Corporation (FDIC) insures almost each bump-up CD account (up to $250,000). This means that, if your bank fails, a good chunk of your money will be insured. This makes bump-up CDs a safe way to invest your money.
    Cons
    • Low initial APY. Because there’s an expectation that you will raise your APY during its term, many financial institutions offer bump-up CDs with a low initial APY. So, even if you do end up raising your rate, you might have been able to earn more interest through a regular CD from the beginning.
    • Locked into a lower APY. When you open a bump-up CD, you’re counting on the fact that interest rates will rise. So if they don’t, you could be permanently locked in at a lower APY and miss out on a higher rate you could have gotten with a different type of CD.
    • Unsure when to bump APY. Knowing when to bump up your APY can be tricky in and of itself. If you increase it too soon, you could miss out on a higher rate. But if you wait too long, you may miss out on a good APY, or you may run out of time to increase it at all.

    If you’re not sure when or if to raise your APY, talk it over with a financial advisor or one of the investment advisors below.

    Bump-up CDs vs. other CDs

    Bump-up CDs share a lot of the same traits as other CDs, but there are some key differences to be aware of. Here’s a breakdown of how a bump-up CD differs from other types of CDs.

    Traditional CDs

    Traditional CDs and bump-up CDs are very similar to each other. As far as security, flexibility, and term lengths, they’re generally the same. But the biggest difference is interest earnings. A traditional bank CD could offer a CD with a higher rate than a bump-up CD, but you’ll be stuck with that rate for the rest of the term.

    A bump-up CD, however, allows you to raise your rates once and, in some cases, even twice. This is great in times of rising interest rates and could help you earn more than you would with a traditional CD. To get a better idea of the interest rates traditional CDs offer, take a look at the CD accounts below.

    Step-up CDs

    Although the names sound similar, a step-up CD and a bump-up CD are two different things. With a step-up CD, the bank automatically raises your APY at different times throughout the CD term. So while you have to ask for it to happen with a bump-up CD, it happens automatically with a step-up CD.

    For example, a bank could set it up where a person’s APY is raised 0.5% every six months until the maturity date. Step-up CDs are less common than bump-up CDs but could be an alternative solution to a bump-up CD.

    CD ladders

    You may have heard the term CD laddering before. CD laddering is when you spread your funds throughout several CDs with different terms. So you could have four different CDs that all mature at different times, taking advantage of different interest rates.

    A CD ladder is a great alternative to a bump-up CD. You may not earn as much as you would through a bump-up CD, but it does allow a lot of flexibility.

    Is a bump-up CD right for me?

    There are a few things to ask yourself before deciding whether a bump-up CD account is best for you. First: Are interest rates expected to rise soon? If so, a bump-up CD is worth considering. It could lead you to get a better rate than you would with a traditional bank CD. If it doesn’t look like interest rates will rise and your bank only offers bump-up CDs with a low initial APY, then you may want to consider other options.

    The second question to ask is what your savings goals are. How long do you want to put your money away for, and how much are you hoping to get from the investment? Once you get these answered, a banker or finance professional could help you sort out if this is the right CD to invest in.

    How to open a bump-up CD

    You can open up a bump-up CD through a credit union, a bank, a nonbank financial institution, or a brokerage. Before committing to a certain bank, be sure to compare financial institutions. When looking at banks and credit unions, be sure to compare the following features:

    • Structure of the bump-ups
    • Starting APY
    • Minimum deposit
    • Early withdrawal penalty
    • Frequency of bump-ups
    • Amount of bump-ups allowed

    Remember that once your bump-up CD account is open, the APY won’t rise automatically, so keep tabs on the current interest rate. This can help you take advantage of the best features of your bump-up CD.

    Pro Tip

    If you’re comparing institutions to open your CD through, be sure to check out online banks. Online banks typically offer better initial APYs with fewer fees, so they’re a good place to start your search.

    FAQs

    Should I wait to invest in CDs?

    Whether or not it’s a good time to invest in a certificate of deposit depends on what the current interest rates are. The higher the interest rate, the better the time is to invest in a CD.

    Is a bump-up CD worth it?

    If market conditions show that interest rates will increase during the term of your CD, then a bump-up CD will likely be worth it.

    Who offers bump-up CDs?

    Many banks — both online and in person — and credit unions offer bump-up CDs, including Discover Bank and Citibank.

    Key Takeaways

    • A bump-up CD is a certificate of deposit that allows you to raise your APY during the CD term.
    • You can usually only raise your APY once during the term, but you may have the option to raise your APY more than once with longer-term CDs.
    • A bump-up CD gives you the chance to earn more than you would with other CDs, such as a traditional bank CD.
    • Many banks only offer bump-up CDs with a low initial APY, and it can be tricky to know when you should raise it.
    View Article Sources
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    2. What is a certificate of deposit (CD)? — Consumer Financial Protection Bureau
    3. Publication 550 | Investment Income and Expenses — IRS
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    5. How to Use a Real Estate Certificate of Deposit to Buy Property — SuperMoney
    6. CD Loan: What Is It and How Does It Work? — SuperMoney
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    9. Which Investment Has the Least Liquidity? — SuperMoney
    10. Where Is a Savings Bond Serial Number? — SuperMoney
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