Are Bump-up CDs Worth Considering?

I am not a big fan of long-term CDs right now. I think the rates are very low, especially compared to more liquid online savings accounts, and that they do not compensate enough for the risk of rising rates and inflation sometime in the future. The other day, a user on BestCashCow asked what I thought about bump-up CDs.

For those not familiar with Bump-up CDs, they generally provide the depositor with the ability to increase the rate a specified number of times during the length of the CD. On a five year CD for instance, the depositor might be able to raise the rate one or two times during the five years. The idea is that if interest rates do rise significantly sometime during the term, the CD rate can reset at a higher rate, taking advantage of this rise in rates. At the same time, if rates decline, the CD can remain at its original rate.

In theory, the concept is sound. Bump-up CDs allow depositors some flexibility so that if rates rise, they won't be stuck in a low yielding CD.

The main criticism of a bump-up CD, as stated in this Kiplinger article, is that the interest rate on a bump-up CD can be substantially lower than on a regular CD to compensate for this flexibility. I did some analysis of bump-up rates versus regular CD rates and surprisingly found them relatively close and sometimes better than their regular counterparts. For example, Bank of America has a bump-up product that it calls its Opt-up CD. The starting rate on the 18-month CD is 0.16% with a $10,000 minimum deposit (it's a pathetic rate) but the regular rate on an 18 month CD was actually worse at 0.07% APY. Likewise, CIT has a bump-up that pays 1.20% as its initial rate while the regular rate is 1.09%. And Ally Bank, which has spent enormous sums of money promoting its Raise Your Rate CD pays 1.30% APY for a 4 year bump-up versus 1.50% APY for a 5 year regular CD (it doesn't offer a regular 4 year CD). While Ally's bump-up rate is lower I'd take the bump-up in exchange for giving up 20 basis points. A quick survey shows that many bump-ups are actually beating regular CD rates in some cases, or coming close to regular rates, even with the added flexibility.

• To view current CD rates, please click here.

Banks are offering such comparable CD rates because they really don't expect interest rates to rise very much over the next couple of years. As rates have fallen over the past five years, bump-ups have beena good marketing ploy but the rate-increase feature hasn't been used. But now that rates seem to be on the rise, albeit a very gentle rise, I expect depositors will be more eager to seek out bump-ups. I also expect banks will begin to offer less yield on their bump-ups. Before that happens, depositors might have a short window of opportunity to both get a good rate and the flexibility to bump-up to even higher rates in the future.

Some Select Bump-Ups to Consider (these rates may be old. Please check our rate tables for updated rates).

CIT

1-Year Achiever CD: 1.00% APY

2-Year Achiever CD: 1.20% APY

You can increase your rate and add additional funds once during the term of the CD.

Ally Bank

2-Year Raise Your Rate CD: 1.00% APY

4-Year Raise Your Rate CD: 1.30% APY

You can raise your rate once with a 2-year CD and twice with a 4-year CD if rates go up during the term period.

Digital Credit Union

Jump-up regular certificate 27 months: 1.13% APY

Jump-up jumbo certificate 27 months: 1.23% APY

Jumbo certificate has a $25,000 minimum balance. Depositors can jump up the rate once per term.

If you find any more good bump-ups post them below and I'll add them to the list.