What is a bump-up CD?
A bump-up CD is a certificate of deposit that gives the holder the option to increase the CD’s interest rate to a higher level. Usually, the CD only permits one rate increase, making it essential for the holder to run the numbers and research the current interest rate climate.
A CD is a savings product with a specified maturity date and a stated rate of interest. Usually, the interest rate stays the same for the life of the CD, but there are some options that permit changes to the interest rate. If you take your money out of the CD before the maturity date, expect to pay a penalty.
Bump-up CDs are also known as step-up CDs. Terms for bump-up CDs vary, but most are between three months and seven years. Since the CD does give the holder the ability to bump the rate up, most bump-up CDs have slightly lower interest rates than other CDs. The required minimum amount for a bump-up CD also varies among different financial institutions, though some have minimums as low as $500.
Many bump-up CDs permit a single rate increase, but some, especially those for longer terms, permit multiple bump ups. There may be rules concerning how much you can bump the rate up at one time.
Bump-up CD example
The Federal Deposit Insurance Corp. insures CDs up to $250,000 per individual, making the CD a popular option for an individual seeking a safe, guaranteed savings product.
For example, let’s say you want to set aside $10,000 to replace the roof on your home. You anticipate that you will not have to replace the roof for a couple years, but you want to keep your money safe in the meantime. You decide to invest in a bump-up CD with a term of 24 months.
Your initial interest rate is 1.5 percent. After a year, rates improve, increasing the market interest rate for a bump-up CD to 2 percent. You use your one bump-up to take advantage of the new 2 percent interest rate.
Ready to open your own CD? Use Bankrate’s rate comparison tool to compare CD rates and find the best product for your money!