Bump-up CDs: What are they and how do they work?
After numerous Fed rate hikes over the last year, borrowers are now paying a lot more to finance their purchases. But while the rate hikes mean higher interest rates on credit cards and loans, they've resulted in some big benefits for savers.
For starters, high-yield savings accounts are currently offering excellent interest rates. It's easy for savers to find high-yield savings accounts offering rates of 4.5% or higher. And, there are numerous certificate of deposit (CD) options that are offering rates as high or higher as high-yield savings accounts at the moment.
There are also a range of options to pick from when it comes to CDs, from regular CDs to jumbo CDs and even bump-up CDs. A bump-up CD is a unique financial instrument that offers an interesting twist on traditional CDs, allowing savers and investors to benefit from rising interest rates.
Find out how you can benefit from opening the right CD, right now.
What are bump-up CDs?
A CD is a deposit account offered by banks and credit unions that requires you to lock in your funds for a specific period in exchange for a fixed interest rate. Bump-up CDs take this concept a step further by providing an option to "bump up" your interest rate during the CD's term.
In other words, a bump-up CD allows you to take advantage of rising interest rates without the need to prematurely close the CD and forfeit interest or pay penalties. This feature makes bump-up CDs particularly attractive in a changing interest rate environment.
Don't miss out. Explore what opening a CD could offer you right now.
How do bump-up CDs work?
When you open a bump-up CD, you'll commit to a specific term, just like a regular CD. This term could range from a few months to several years. At the start of the term, you'll receive an interest rate that is fixed for the entire period.
This initial rate is generally lower than what you might find for longer-term CDs without the bump-up feature. However, you also get the option to request a higher interest rate if market interest rates increase after you've opened the CD.
Financial institutions typically set certain conditions for bumping up the interest rate. These conditions might include a minimum time period before the first bump is allowed, a maximum number of times you can bump up or rules about how much the rate can be increased each time.
When you decide to bump up the interest rate, the new rate is adjusted based on prevailing market rates. The adjustment might be in line with the institution's policies or could be a percentage point increase.
Pros and cons of bump-up CDs
As with any financial product, there are advantages and disadvantages to consider, including:
Pros of bump-up CDs
- Potential for higher returns: Bump-up CDs offer the potential to earn higher interest if market rates rise during the CD's term.
- Flexibility: You can benefit from rising rates without the need to prematurely close the CD.
Cons of bump-up CDs
- Lower initial rates: Bump-up CDs often start with lower initial rates compared to regular CDs with fixed rates of the same term.
- Limited bumps: Financial institutions might impose limits on how many times you can bump up the rate, potentially limiting your ability to capitalize on rising rates.
- Complexity: Bump-up CDs can be more complex to understand than standard CDs, especially when considering the rules and conditions for bumping up rates.
The bottom line
Bump-up CDs present an intriguing opportunity for savers and investors who want to position themselves favorably in a changing interest rate landscape, but they may not be the right move for every saver. It's important to understand how they work and weigh the pros and cons beforehand. That way, you can make an informed decision about whether a bump-up CD aligns with your financial strategy.
