Until today, I don’t believe I’ve ever seen any online bank offer a bump up CD. A bump up CD is a certificate of deposit that gives you the option to increase the current rate of your CD to the published rate, “bumping” it up. If you remember my attempt at being cute with the Certificate of Deposit Zoo , it was the giraffe. 🙂
The biggest risk with long term CDs is inflation risk. If you open a two-year CD at 2% and inflation is 3% a year, you’ve effectively lost 1% of purchasing power on that money each year. While it’s better than being in a checking account earning 0%, thus losing 3% each year, your money is “stuck” unless you want to pay a penalty.
Bump up CDs take away some of that risk because they let you bump up the CD’s interest rate one time. Does that make a bump up CD a sure thing? No, but if you have the choice between two long term CDs with identical interest rates, it’s obvious that the CD with a bump up option is superior.
Here’s the email I received from Ally :
When your current Ally CD matures, we want you to reinvest with confidence. And now, thanks to a flexible new option in our 2-Year CD, you can.
The Ally 2-Year CD features a new one-time rate increase. Now you not only get a great rate—you get the opportunity to move to a better one if our rates go up during the 2-year term. All you need to do is call us.
Of course, our 2-Year CD comes with Ally’s Ten Day Best Rate Guarantee. When you fund your CD within ten days of opening or renewing your Ally account, you automatically get the best rate we offer during that time period.
While it seems to imply that you have to renew a CD, that’s not the case. All 2 year CDs have the bump up option. How does this compare with other long term CD rates ? Bankrate says that the average rate on a 3-year CD is 2.208% (as of today), so Ally’s rate is quite competitive especially when you consider it has a bump up option.