A bump-up certificate of deposit (CD), also known as a step-up CD or raise-your-rate CD, is a type of savings account that allows the account owner to “bump up” or increase the interest rate they earn if rates rise during the CD term. Typically, one bump up is allowed, and the other terms of the CD remain the same after that.
The initial interest rate of a bump-up CD is lower than other types of CDs, but it comes with the potential opportunity to earn a higher rate.
What Is a Bump-Up CD?
A bump-up certificate of deposit is a type of savings account that is similar to an ordinary CD in many ways.
If an investor opens a bump-up CD account, it will start out with a certain interest rate. The investor will be required to deposit a certain amount of money to open the account and agree to keep it there for a specified period. The major difference between a bump-up CD and a traditional CD is that the account owner can potentially increase the interest rate they earn if rates go up during the term of the CD. This bump up is typically allowed only once during the CD term.
How a Bump-Up CD Works
If, during the term of a CD, the issuer’s interest rates increase, the CD account owner can ask the issuing bank to raise the interest rate they earn on their CD. This is quite different from a standard savings account, where the account owner has no control over the interest rate. So if the initial rate on a bump-up CD is 4.00%, and during the maturity term the rate increases to 5.00%, the account holder can request a bump up to 5.00%.
If the interest rate drops to 4.50% sometime after that, the investor is protected and keeps their bump up to 5.00%.
Usually, interest rates can only be increased one time during a CD term, but some banks do offer multiple bump-ups if the term of the CD is long. Also important to note is that some banks may put a cap on how high the interest rate can be bumped on a CD. So if interest rates go up a lot, CD owners may not be able to fully take advantage. Generally, bump-up CDs have a two- to four-year term. Like a regular CD, these accounts are FDIC-insured.
Recommended: How to Invest in CDs
Example of a Bump-Up CD
Say an investor opens a bump-up CD with a two-year term and a rate of 4.00%. One year into the CD term, the issuing bank’s interest rates rise, and they now offer 5.00% on the same type of CD. The investor can request that the rate on their CD be increased to the new rate of 5.00% for the second year of its term.
In this example, if the investor deposited $10,000 into the CD when they opened it and earned 4.00% on their money for the full two-year term, by the end of the term they would have $10,816.00 at the maturity date. However, if they earned 4.00% for the first year and 5.00% for the second year, at the maturity date they would have $10,900.00, or about $84 more. That might not seem like a lot, but when you’re saving and investing for the future, every little bit helps.
Advantages of Bump-Up CDs
There are some benefits to bump-up CDs, including:
• Ability to raise the CD’s interest rate during its maturity term instead of having to wait or open a new CD
• The potential to get new, higher rates without any early withdrawal penalties
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Up to 4.00% APY on savings balances.
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Disadvantages of Bump-Up CDs
Bump-up CDs come with some drawbacks as well. Here are some to consider.
• Since bump-up CDs typically allow only one bump up, they are recommended for investors who have a deep understanding of the interest-rate system and what might happen during their investment term.
• The initial interest rate on bump-up CDs tends to be lower than other types of CDs. So even though there is the ability to raise the rate later, a traditional certificate of deposit may still earn more interest since it likely starts at a higher rate.
• Interest rates may not go up during the CD term, locking the investor into the initial lower rate.
• If interest rates do start to increase, timing the bump-up on a CD can be challenging. By bumping up earlier you can take advantage of a higher interest rate for more time, but you could miss out on an even higher rate that might come later.
How to Open a Bump-Up CD
Banks and credit unions offer bump-up CDs just like they offer checking and savings accounts. To open a bump-up CD, an investor deposits a certain amount, and the CD has a particular starting interest rate and term. Once the bump-up CD is open, the account owner can contact the issuing bank or credit union to increase the rate if it rises during the CD term. As mentioned, bump-up CDs typically offer the account holder just one opportunity to request a rate increase.
Factors to consider when opening a CD include:
• Maturity term of the CD: Bump-up CDs tend to have longer terms than traditional CDs, such as two years or more.
• Bump-up frequency: Does the CD offer the opportunity to bump up more than once? Many don’t but some may.
• Initial interest rate: If interest rates don’t rise, the initial rate will be the ongoing rate throughout the CD term. And bump-up CDs tend to have lower interest rates to begin with.
• Minimum deposit to open the account: Some bump-up CDs may require higher minimum deposits than traditional CDs, depending on the issuer.
• Early withdrawal rules and penalties: Inquire with the financial institution what the consequences might be for cashing in the CD before the term ends.
• Fees: Typically, there aren’t fees involved with CDs, but that isn’t always the case. Find out if there are any fees and how much they are.
Alternatives to Bump-Up CDs
There are several other types of interest-bearing deposit accounts and CD investment strategies that investors may want to consider, such as:
Traditional CD
A traditional CD has a fixed interest rate over the course of its maturity term. Traditional CDs often earn higher rates than bump-up CDs. They also usually have shorter terms.
CD Laddering
Since it can be hard to predict what will happen with interest rates in the future, another investing strategy is to create a CD ladder.
A CD ladder is a portfolio of CDs that each have a different interest rate and maturity term. This strategy provides an investor with a range of interest rates, allowing them to take advantage of changes in the market. Each time one of their CDs matures they have some funds to put into a new CD or cash out. Usually, a longer-term CD will have a higher rate, but by opening some shorter-term CDs as well, investors can put their money into new ones if interest rates increase, rather than opening a bump-up CD.
Here is an example of how an individual might set up a CD ladder with five rungs if they have $10,000 to invest:
• $2,000 in a one-year CD
• $2,000 in two-year CD
• $2,000 in a three-year CD
• $2,000 in a four-year CD
• $2,000 in a five-year CD
As each CD matures, they can reinvest the funds into a new CD if interest rates are rising.
Step-Up CD
Similar to a bump-up CD, step-up CDs allow investors to take advantage of rising interest rates. The difference is, with a step-up CD, the issuer automatically raises the interest rates at certain intervals throughout the CD term. With a bump-up CD the rate is not automatically increased.
If you are looking for ways to bump up your savings, there are some other options in addition to CDs that you may want to consider. For instance, one way to potentially increase your savings is with a bank account with competitive rates, such as a high-yield savings account. You can shop around and explore the different savings options to see what might be right for you.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What is an 18-month bump-up CD?
An 18-month bump-up CD is a certificate of deposit savings account that earns a certain amount of interest over the course of 18 months. If interest rates rise during that time, the account owner can request that the interest rate their CD earns be increased to the new rate.
When should I bump up my CD?
If you have a bump-up CD, you may want to consider a bump up when interest rates rise. However, remember that you are typically only allowed to bump up the rate once during the term of the CD. For this reason, bump-up CDs are generally best for investors who have a deep understanding of the interest-rate system and what might happen to rates during their CD term.
Who has bump-up CDs?
Bump-up CDs are typically offered by banks, online banks, and credit unions. You can explore bump-up CD options at different financial institutions to find one with the best rates and terms for you.
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4.00% APY
SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
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