What Is a Bump-Up CD?

A bump-up CD, sometimes called a trade-up CD, allows you to increase your CD’s interest rate during its term. Typically, you can request a rate increase once, aligning your new rate with the bank’s current offering for a similar CD.

For example, if you invest $5,000 in a two-year CD with a 3% interest rate and, a year later, the bank offers a two-year CD with a 4% interest rate, you can request a “bump” to the 4% rate. The new rate will apply to your CD’s balance for the remainder of its term.

Pros and Cons of Bump-Up CDs

Benefits of a Bump-Up CD

• You can increase your CD’s interest rate to match the bank’s current offering.
• Bump-up CDs are more widely available than step-up CDs.
• You have the flexibility to choose when to request the rate increase.

Disadvantages of a Bump-Up CD

• The starting interest rate may be lower than a fixed-rate CD.
• You might only be able to request one interest rate increase during the CD’s term.
• You need to monitor the bank’s current CD offerings to determine the best time to request a bump.

What Is a Step-Up CD?

A step-up CD features several interest rate increases based on a predetermined schedule. Unlike bump-up CDs, you don’t need to request the rate increases; they occur automatically. Banks can show you the blended or composite interest rate for step-up CDs, which is the yield you’ll get if you don’t make any early withdrawals.

Pros and Cons of Step-Up CDs

Benefits of a Step-Up CD

• Predictable returns with a known term and interest rate schedule.
• Steady interest rate increases applied to your entire balance.
• Beneficial if interest rates decline, as your CD’s rate will still increase.

Disadvantages of a Step-Up CD

• Very low starting interest rates.
• Low composite rates may make them less appealing compared to fixed-rate CDs.
• Step-up CDs are not widely available.

How to Open a Bump-Up or Step-Up CD

Here are the steps to open a bump-up or step-up CD:

1. Compare rates and terms: Look at different banks and credit unions to find the best interest rates and terms for your investment amount and desired term.
2. Review your eligibility: Ensure you meet the minimum balance requirements and any membership criteria if you’re considering a credit union.
3. Complete the application: You can often apply online, providing personal and identifying information such as your date of birth, address, Social Security number, and a government-issued ID.
4. Fund the CD: Choose how to transfer the money, either through an online transfer or by bringing a check to a branch.

Alternatives to Bump-Up and Step-Up CDs

While bump-up and step-up CDs offer unique benefits, they may not always provide the highest returns or flexibility. Consider these alternatives:

• Fixed-rate CDs: Often start with higher rates than bump-up or step-up CDs, making them a good option if you don’t expect interest rates to rise significantly.
• No-penalty CDs: Allow you to withdraw your money without penalties, offering more flexibility if interest rates increase.
• CD Ladder: Involves opening multiple fixed-rate CDs with varying maturities, providing regular access to your funds and the ability to take advantage of rising rates.
• High-yield savings or money market accounts: Offer competitive interest rates without locking up your money, though the rates can change at any time.

The Bottom Line

Choosing the right savings and investment accounts depends on your financial goals and the current interest rate environment. Bump-up and step-up CDs can be valuable tools if you’re concerned about fluctuating interest rates. However, it’s essential to compare all your options to find the best fit for your needs.

For expert mortgage services, contact O1ne Mortgage at 213-732-3074. Our team is here to help you navigate your mortgage needs with confidence and ease.