Bump-Up CDs

A bump-up CD is a certificate of deposit that lets you increase the interest rate once before maturity. Some longer-term bump-up CDs allow multiple rate adjustments. This feature capitalizes on rising rates, potentially earning you more. It’s similar to a step-up CD, making it a flexible choice for optimizing savings.

  • Written By
    Thomas J. Brock, CFA®, CPA

    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Expert

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

    Read More
  • Edited By
    Savannah Pittle
    Savannah Pittle, senior financial editor for Annuity.org

    Savannah Pittle

    Senior Financial Editor

    Savannah Pittle is an accomplished writer, editor and content marketer. She joined Annuity.org as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.

    Read More
  • Financially Reviewed By
    Peggy James, CPA
    Peggy James CPA

    Peggy James, CPA

    Independent Accountant and Financial Coach

    Peggy James is a certified public accountant with a Master of Accounting. She has spent the past several years of her career focused on working in higher education finance roles. Peggy also has accounting and finance experience working in the corporate and nonprofit sectors.

    Read More
  • Updated: August 14, 2023
  • 5 min read time
  • This page features 3 Cited Research Articles
Fact Checked
Fact Checked

Annuity.org partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.

Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.

Why Trust Annuity.org
Why You Can Trust Annuity.org
Content created by Annuity.org and sponsored by our affiliates.

Annuity.org has been providing consumers with the tools and knowledge needed to confidently make financial decisions since 2013.

We accept limited advertising on our site to help fund our work, including the use of affiliate links. We may earn a commission when you click on the links at no additional cost to you.

The content and tools created by Annuity.org adhere to strict editorial guidelines to ensure quality and transparency.

Key Takeaways

  • A bump-up CD allows an account holder to increase the interest rate earned on a fixed-rated CD account.
  • Bump-up CDs tend to offer lower interest rates than equivalent-maturity CDs that do not have bump-up optionality.
  • A bump-up CD option is especially advantageous if you think interest rates will increase during your CD’s term.

What Is a Bump-Up CD?

A certificate of deposit (CD) is a savings account offered by banks and credit unions. It provides the account holder interest income, in exchange for a commitment to leave his or her money on deposit for a predetermined amount of time, usually, anywhere from one month to five years. Generally, early withdrawal results in a loss-of-interest penalty.

A bump-up is a special type of CD. Whereas a traditional CD offers a fixed rate of interest that does not change, a bump-up CD gives the account holder the option to increase the rate of interest, if prevailing marketplace conditions warrant it. Generally, only one interest rate bump per CD term is permitted, but some longer-maturity instruments allow for multiple bumps.

Did You Know?

The interest rate on a CD typically increases with the length of the CD term and the amount of money invested, assuming other factors remain constant.

How Does a Bump-up CD Work?

The process for investing in a bump-up CD begins the same way as the opening of a traditional CD: You must apply online or in person with the issuing bank or credit union. The primary difference is that the terms agreed to on a traditional CD will not change, but you have the option to increase the interest rate offered on a bump-up CD if marketplace conditions warrant it.

To help illustrate, imagine the following:

  • You buy a $10,000 bump-up CD on January 1, 2023.
  • The term is three years (maturity on January 1, 2026), with an annual percentage rate (APY) of 4.00%.
  • The issuing bank allows for one rate bump during the CD term, if the bank has raised rates for newly issued CDs with the same term. Essentially, the bump allows you to earn the prevailing interest rate for the rest of your term.

During the first year, you earn $400 of interest ($10,000 × 0.040 = $400), but interest rates have risen sharply. In fact, the APY on a new 3-year bump-up CD is 5.50%.

You elect to exercise your bump-up option. As a result, you earn $550 of interest ($10,000 × 0.055 = $550) in each of the remaining two years of your term.

Bump-Up CDs vs. Traditional CDs

Beyond the interest rate adjustment optionality, there are a few other notable differences between bump-up CDs and traditional CDs. First, bump-up CDs are much less common than traditional CDs. So, the tenures offered for these instruments are relatively limited.

Second, the interest rates offered on bump-up CDs are usually lower than those offered on traditional CDs. The rationale is simple. With a bump-up CD, interest rate risk is shifted from you to the financial institution. The cost for risk reduction is a lower interest rate.

Pros and Cons of Bump-Up CDs

CDs are generally considered safe and stable investments, as they are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and the National Credit Union Administration (NCUA) for credit unions. When properly structured, they are fully insured for up to $250,000 for an individual account and $500,000 for a joint account.

However, traditional CDs have drawbacks such as inflation risk and illiquidity. They require the investor to lock up their money for a specified period and may incur significant penalties for early withdrawals.

Bump-up CDs offer some protection against inflation risk by allowing the investor to adjust the interest rate upward and keep pace with inflation, but they still have the same level of illiquidity as traditional CDs.

Who Should Invest in Bump-Up CDs?

Regardless of the terms, CDs are broadly popular with people who value high-quality, stable-value and interest-bearing vehicles and can afford to lock up their cash for a time. Often, these investments serve as a complement to a broader portfolio of cash and long-term holdings, such as stocks, bonds and alternative investments.

When it comes to investing in a bump-up CD or a traditional CD, the most important consideration is your view on the trajectory of future interest rates. A bump-up CD is optimal for an investor that is worried about rising rates. It allows you to take advantage of rising rates, without assuming any downside interest rate risk.

That said, interest rate risk mitigation has a cost. At the onset of opening a bump-up CD, you stand to earn less interest than a traditional CD. Ultimately, if interest rates do not increase, you will earn less income than you could have achieved with a traditional CD.

Alternatives to CDs

There are several alternatives to CDs that offer different rates of return and levels of risk.

Some alternatives include:

Traditional Savings Accounts
These accounts typically offer lower interest rates than CDs, but they also have much more flexibility and liquidity.
High-Yield Savings Accounts
Online banks usually often offer these highly liquid accounts with competitive yields, but unlike a fixed-rate CD, the yield on these accounts can fluctuate.
Money Market Accounts
These accounts are similar to savings accounts, but they typically offer higher interest rates and may require higher minimum balances.
Treasury Bills
These are debt securities issued by the U.S. government with maturities of one year or less. They are considered very safe investments, but they also have low returns.
These are debt securities issued by companies or municipalities. They offer higher returns than CDs, but they also carry more risk.
Mutual Funds
These are professionally managed portfolios of stocks, bonds, and other securities. They offer a wide range of returns and risks depending on the fund’s investment strategy.
These are ownership stakes in individual companies. They have the potential for high returns, but they also carry a high level of risk.

It is important to note that before investing in any of the above alternatives, consider your financial goals with a trusted financial advisor.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 14, 2023