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What is a bump-up CD?

These CD accounts allow you to take advantage of rising rates without incurring an early withdrawal penalty — but there are some potential drawbacks.

Yahoo Personal Finance· Getty Images
Sarah C. Brady
·Contributor
4 min read

Are you interested in earning a higher rate on your savings but nervous about locking in a rate with a certificate of deposit (CD)? With interest rates constantly fluctuating, you have good reason to hesitate. Since early 2021, CD rates have skyrocketed, with the average rate for 6-month CDs jumping from just 0.9% to 1.52%, according to the FDIC.

Hypothetically, bump-up CDs solve this problem; they allow you to raise your APY if rates increase during your term. But the starting rates on bump-up CDs are lower compared to regular CDs, and you're typically allowed just one rate increase over the life of the account.

Here’s what you should know about bump-up CDs and whether they make sense for you.

Most CDs have fixed interest rates, meaning the rate doesn't change during the term. With bump-up CDs, however, you get a fixed starting rate plus the opportunity to request an increase down the line.

However, there are tradeoffs for that flexibility. As with no-penalty CDs, APYs on bump-up accounts are comparatively low. Plus, there are stipulations about when and how you can increase your rate. If the CD issuer raises the available rate on their bump-up account, you can request an adjustment up to that rate. But requests are typically allowed just one time during the life of your CD, and most bump-up CDs mature at either 12 or 24 months.

A few helpful other details to consider before opening a bump-up CD:

  • CD rates can change monthly, but there's no guarantee they'll increase.

  • You can start accruing interest at the new rate the same day you make your request.

  • There's no penalty for raising your rate.

  • Bump-up CDs with longer terms may have the option for more than one rate increase.

Outside of those details, bump-up CDs are basically the same as regular CDs. Whichever one you choose, you can withdraw your deposit, plus any interest earned, once you reach the maturity date.

If you discover that your CD issuer has published a higher rate for their bump-up CD, you can request an adjustment up to that rate. Here's what the process generally looks like:

  1. Open your bump-up CD.

  2. If applicable, observe the required waiting period, which could be around 10 days.

  3. Monitor the bank's website and your account to see if there's a change to the published rate.

  4. If the rate increases, log in to your online profile or bank app, or contact the issuer directly to submit a request.

Bump-up CDs can be worth using under specific circumstances. If you don't need access to your cash deposit for the next year or two and interest rates are expected to increase during that time, a bump-up CD can help you earn some interest and hedge your bets.

However, the Federal Reserve decided to cut its target rate in September, which will cause deposit rates to begin fallying. That means 2024 probably isn't a good year to open a bump-up CD. If you do, you could miss out on the high rates that are available now.

Considering how high regular CD rates are, there's a chance your bump-up rate won't match what's already available, even if it does increase at some point.

With interest rates hovering near record highs, now is a great time to earn money on your cash deposits. Instead of accepting the low starting rate that comes with bump-up CDs, consider these alternatives:

Treasury bills, or T-bills, can be a better investment than CDs for someone who wants to invest for a year or less since the rates are comparable — currently up to 5.41%. And while T-bills have fixed interest rates and set terms like CDs, you don't have to pay state income taxes on the earnings.

Another way to earn 5% APY or even more is with a high-yield savings account (HYSA). While these accounts don't have fixed rates, they can work better than CDs for someone worried about liquidity since you're usually allowed up to six withdrawals from a HYSA each month (some accounts offer unlimited withdrawals).

When you choose a traditional CD, you'll typically earn a higher rate than on a bump-up CD, and the rate is guaranteed for the full life of the account. On top of that, it's not hard to find CDs with APY above 5%. But if you're still hesitant about locking in a rate, you could try CD laddering, which involves spreading your deposits across multiple CDs with varying maturity dates.