The Benefits of Bump-Up CDs

NEW YORK (RateWatch) – With certificate of deposit rates dropping lower and lower – the average APY for 12-month CDs currently sits at 0.532%, according to RateWatch – it’s not unreasonable to wonder if it’s wise to put money in a CD at all.

Of course, interest rate risk is always a factor when considering a CD, but indications that CD rates will soon start to rise raise the concern of being locked into a low rate. Some banks offer “bump-up” CDs that insure you against the possibility of being stuck with a low rate while watching helplessly as interest rates rise.

Last month we looked at no-penalty CDs, which essentially offer you the right to press the eject button and escape from your CD contract without paying a price. But if you don’t want to deal with taking out your money and starting over with a new CD, the bump-up CD gives you the opportunity to get a better rate in the middle of your term.

That doesn’t mean your rate will just rise as the interest rate does, though. Typically these bump-up CDs usually allow only a single “bump” to the current rate for a similar product at the bank. The San Diego County Credit Union, for instance, offers a 23-month bump-up CD at a 1.35% APY that you can bump once to a replacement rate from a non-promotional CD or IRA at the credit union.

If you’d like more flexibility, some banks offer two bumps. The Iowa-based First National Bank of West Union, for instance, has a 30-month CD that it advertises as “two times repriceable.” 

Of course, there’s some calculation involved in making the most of these CDs. Burn your bump(s) too soon and you may miss out on even higher rates; burn it too late and your money won’t spend as much time earning interest at the higher rate. And as with no-penalty CDs, the banks count on indecisive or inattentive customers who don’t use their bump in time to make any serious difference in their earnings.

Similar products are available to customers who are worried about interest rate risk but don’t want to deal with calculating optimal bump times and predicting the ebbs and flows of the interest rate market. So-called “step-up” CDs likewise offer a bump if rates increase, but it happens automatically. The United Bank of Union, Missouri, for instance, offers a 36-month CD with a 2.12% APY, which increases automatically after 24 months if the bank’s CD rates have gone up. They also offer a 60-month CD, but the bump doesn’t kick in until three years have elapsed.

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