A certificate of deposit (CD) is a savings account you’d open through a bank or credit union. You invest for a certain amount of time, and the financial institution returns your money with earned interest at maturity.

A bump-up CD allows you to increase — bump up — the interest rate one or more times during the term. While traditional CDs typically maintain the same interest for their entire duration, a bump-up CD allows you to benefit if rates rise after opening the account. These investments may make sense for savers who want the safety of the CD but don’t want to be potentially stuck with below-market earnings.

While bump-up CDs give you access to better interst rates, fixed annuities beat most CDs’ interest rates. Gainbridge’s annuities are flexible, customer-centric financial solutions that suit any savings goal. 

Read on to learn about the pros and cons of bump-up CDs and why annuities may be a strong alternative.

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How does a bump-rate CD work?

Like traditional CDs, bump-up terms can last anywhere from a few months to five years. Longer terms give the market more time to adjust, which may give you better earnings if you capitalize on the shift in time.

In exchange for the interest rate increase benefit, bump-up CDs generally offer slightly lower rates. Most allow one rate increase, but some CDs — particularly those with a longer term — permit multiple bump ups. 

Let’s say you open a 20-month bump-up CD with an initial annual percentage yield (APY) of 3.9%. A few months into your CD term, your financial institution increases the APY to 4.7%. You can take this higher interest rate for the remainder of your term.

Note: You’ll likely be limited to the bank's highest APY on bump-up CDs only. Rules vary between financial institutions, so check your bank’s offer to see how many times you can increase your interest rate and by how much.

Pros and cons of bump-up CDs

Bump-up CDs offer more flexibility than other investments, but the benefits might not be enough to make this CD account work for you. As you research your options, consider the following advantages and disadvantages of bump-up CDs.

Pros of bump-up CDs

• Flexibility: Bump-up CDs give you access to potentially higher rates, so you’re not locked in for the entire term.
• Protection against rising rates: Bump-up CDs can hedge against rising interest rates. When market conditions change, you can increase your earnings to maintain purchasing power.
• FDIC insurance: Like with all CDs and bank deposit accounts, the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) insures your funds. They protect up to $250,000 for an individual account and $500,000 for a joint account.

Cons of bump-up CDs

• Lower initial rates: Because there’s room to grow, bump-up CDs often offer lower starting interest than you’d earn with a fixed-rate CD.
• Limited bump-up opportunities: Most of the time, your bank gives you one bump-up opportunity. If interest rates don’t rise, you’re stuck with your initial contract, which might result in lower earnings than you could have found with another CD or investment, such as an annuity.

Step-up CDs vs. bump-up CDs: What’s the difference?

Although the terms sound similar, a bump-up CD isn’t the same as a step-up CD. You have to request bump-up CD rate increases, but step-up accounts schedule these boosts in advance. While these guaranteed changes aren’t affected by market fluctuations, they don’t always provide the best rate of return.

Say you have a 28-month step-up CD that increases your rate every seven months. Interest would rise like so:

• 0.05% for the first seven months
• 0.25% for the next seven months
• 0.45% for the subsequent seven months
• 0.65% for the final seven months

In this case, your bank pays a blended APY of 0.35%.

When does a bump-up CD make sense for you?

Deciding if a rate-bump CD may be a good option depends on market conditions, interest rate projections, and your personal savings needs. 

If you lock in a strong initial rate and expect rates to rise early in the term, a bump-up CD could yield a better return than a fixed-rate CD. In this scenario, a bump-up might be the way to go. 

But it’s difficult to get the highest rates available from the start, and predicting where the market will lead is a challenge. Even after an increase, you might be able to earn a higher, guaranteed, and equally safe rate of return elsewhere.

If you’re a cautious saver, you may prefer the flexibility and control of a bump-up CD and be willing to take a lower interest rate in return. But using your bump for a higher interest rate might never happen, making high earnings less than a sure thing. Alternatives exist that blend peace of mind with competitive interest rates.

FAQ

When should I bump up my CD? 

The best time to bump up your CD depends on market conditions. If you think rates will continue to rise, it may be in your best interest to wait, especially if your account only offers one bump. But if you suspect a downward trend is coming, it’s better to lock in new rates while they’re high. 

Does a bump-up CD allow an investor to increase the amount invested?

Most CDs don’t allow you to invest funds after your initial deposit. Some offer add-on options, which let you contribute at any time. Check with your financial institution to see whether they offer a hybrid of these two products.

What’s the difference between a no-penalty CD and a rate-bump CD?

No-penalty CDs allow you to withdraw your funds at any time without incurring fees. Rate-bump CDs let you increase your interest rate one or multiple times throughout the term. Because of these advantages, both typically offer lower starting interest rates than other types of CDs.

Beat CD rates with Gainbridge’s modern annuities

Gainbridge’s annuities offer APYs that beat most banks.

Get started with Gainbridge today.

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This article is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. The Gainbridge® digital platform provides informational and educational resources intended only for self-directed purposes.

Annuities issued by Gainbridge Life Insurance Company located in Zionsville, Indiana