Should You Be Considering Bump Up CDs?

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A bump up certificate of deposit (CD) is a traditional CD with a twist. With a traditional CD, you are paid a set interest rate for the life of the CD – nothing more, nothing less. CDs are appealing because they’re predictable. They’re FDIC insured and you know that your principal is protected 100%.

With a bump up CD, you get the added bonus of knowing that if interest rates rise, you can get your rate increased. The rules vary from bank to bank but the basic idea is the same, you can “bump up” the rate on the CD if it exceeds the CD’s current rate. The bump up CD won’t usually have the best CD rates but they do tease you with the ability to increase that rate should yields improve.

Bump Up vs. Traditional

The trade off is that the bump up CD’s existing rate is going to be lower than a traditional CD for the same period. Ally Bank, a popular online bank, has a Raise Your Rate CD with a maturity of 24 months and a rate of 1.49% APY. Cleverly, they do not have a 24 month traditional CD for us to make a straight comparison but the 18 month CD yields 1.34% APY and the 3 year CD yields 1.80% APY. ING Direct, another online savings bank, doesn’t even have a CD yielding more than 1.25% APY.

Personally, I ladder my certificates of deposit and I go with whatever rate is highest for the maturity I need. If Ally Bank offered a 12-month CD that boasted a higher yield than their Raise Your Rate CD, I’d go with that one. I recognize that the Raise Your Rate can potentially yield me the most, if CD yields increase, but I don’t buy CDs because I intend to make money off them. I use it as a convenient savings vehicle that gets me slightly more than cash.

What do you think of bump up CDs?

{ 11 comments, please add your thoughts now! }

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11 Responses to “Should You Be Considering Bump Up CDs?”

  1. Psychonomics says:

    I kind of thought that CDs were obsolete. There rate of return is not significantly higher than that of a savings account. It’s not high enough to account for the loss of liquidity.

    • billsnider says:

      I agree. I let all my CD’s lapse. The interest rates are to low to risk tieing up my deposits.

      Bill Snider

    • Aaron says:

      I’ve started buying a few of Ally’s normal (not raise-your-rate) CDs, because the rates are relatively decent, and the early withdrawal penalty (at least for a 5 year) is only 2 months, keeping the funds fairly liquid.

    • skylog says:

      agreed. it is hardly worth it at this point to have anything in an online savings account as well. it is that much harder to find a reason to put that money into CDs.

  2. daenyll says:

    I had been using staggered maturity CDs for the specific goal of keeping them in a less liquid format and separate from the rest of my savings for long term or major emergency, but the rates are now lower than my online savings accounts. I’ve simply opened an extra savings account and I’m transferring the CDs to this as they mature.

  3. zapeta says:

    In this rate environment, cd rates and savings rates both suck. If I were using CD’s now, I’d just ladder with the highest rates I could find, and Ally is attractive due to their low early withdrawal penalty and decent rates. However, for now I’m just using regular savings since the rate differences are pretty low and they are definitely liquid.

  4. Joe says:

    Huh. If they’re lowering the interest rate of the existing rates, then you’re making very, very little with these Bump Up CDs. Doesn’t sound worth it.

  5. Strebkr says:

    Its a tough discussion to have when CD rates are below 1%. A few years ago these things were at or above 4%. Thats big difference.

  6. thunderthighs says:

    I don’t understand why anyone would keep money in a CD unless they wanted to keep it very same for a temporary period. The rates are disgraceful!

  7. mikestreb says:

    I remember when WAMU had 5% CDs, then they fell apart and they transferred to Chase. When they came due, Chase wanted them to renew at I think 0.76%. I of course passed and doubt I will ever use a CD again…

    My checking account is earning 5.01% right now, so I won’t be moving what little money I still have any time soon!

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