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Should You Be Considering Bump Up CDs?

A bump up certificate of deposit [3] (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 [4] 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 [5], 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 [6], another online savings bank, doesn’t even have a CD yielding more than 1.25% APY.

Personally, I ladder my certificates of deposit [7] 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?