What is a Bump Up Certificate of Deposit?
A bump up certificate of deposit (CD) is a savings certificate that allows investors to take advantage of rising interest rates through a single (or in some cases, multiple) time increase on the interest rate paid for the remainder of a specified term. While a bump up CD provides benefit to the holder in a rising rate environment, it can initially earn a lower APY than a traditional CD.
Issued by banks, bump up CDs allow investors to earn interest on their savings for a fixed period of time. At maturity, investors can fully access the funds without penalty. While it is possible to access the money before the maturity date, doing so will more than likely incur an early withdrawal penalty.
For investors looking for more consistent access to liquid funds, “laddering” is an option with bump up CDs, as well as traditional CDs. This means purchasing multiple CDs at once with varying maturity dates, such as 1-year, 2-year, 3 or even 5-year terms. “Laddering” provides investors with more flexibility in accessing funds because the lack of early withdrawal penalties due to varying maturity dates. At the same time, earning potentially higher yields through staggered terms that may pay higher APYs as opposed to having one 12-month CD that matures every year.
What are the benefits of a bump up CD?
When looking to manage and protect financial savings, bump up CDs are seen as a predictable, stable, and dependable route. Some benefits include:
- Bump up CDs take advantage of rising rates: Traditionally, bump-up CDs allow for a single interest rate increase over the term of the investment, allowing investors to benefit from rising interest rates. However, some bump up CDs with longer terms can allow for multiple increases before the maturity date. But be aware that those allowing for multiple rate increases might also require an increase in terms with each rate increase.
- Bump up CDs aren’t vulnerable to lowering rates: When rates are rising, bump up CDs provide investors with a financial advantage without exposure to declining returns from adjustable or floating rates. If interest rates lower, investors can simply maintain their existing rate.
- Bump up CDs have an advantage over traditional CDs: Bump up CDs allow investors to take advantage of rising interest rates, avoiding the downside associated with locking money in a traditional CD where the rate is locked in for the full term.
- Bump up CDs are a safe investment: Overall, bump-up CDs are an acceptably safe investment. Unlike riskier investments, CDs can be counted on to deliver a specific yield at a specific time. Even if rates fall in the broader economy, your rate will be fixed for the full-term CD term.
- Bump up CDs are insured investments: Like most deposit products, CDs from federally insured banks are covered by FDIC insurance. If a bank that’s insured fails, the FDIC will reimburse the bank’s account holders for their deposits up to the insured limit. The standard FDIC insurance amount of $250,000 per depositor and insured bank includes bump up CDs. Depending on ownership, bump up CDs can be insured for more.
- Bump up timing is up to the investor: While the number of APY increases on a bump up CD is decided by the issuing bank, the timing of the increase(s) is essentially up to the customer, with some limits such as a waiting period.
Are bump up CDs a worthwhile investment?
The decision to invest in a bump up CD can be heavily influenced by the interest rate environment, particularly when inflation rates threaten the value of fixed-rate investments. The current economic environment, as well as the risks and benefits associated, should be fully considered when determining the right CD strategy for your financial goals.
While the rate of inflation can outpace the APY of a traditional CD, bump up CDs offer an advantage by allowing for a single (or multiple) time rate increase, depending on the bank and terms offered. However, they’re not fully immune to inflation risks.
Overall bump up CDs offer a secure way to invest your money and are a worthwhile consideration when looking to expand your financial portfolio.