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Banking

Bump up CDs allow you to increase your APY when rates rise — here’s how they work

When interest rates rise, a bump-up CD can help you earn higher yields and boost your savings.

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The best time to put your money in a savings account is when interest rates are increasing. A bump-up CD can help you take advantage of such an environment and maximize your yields.

A bump-up CD is a type of savings certificate that allows you to request a rate increase while the CD continues to mature without changing any other terms. If you closely watch interest rate fluctuations and can time your request right, you might get a nice boost to your savings.

Below, CNBC Select breaks down how bump-up CDs work, how to open one — and whether you should.

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How bump-up CDs work

Unlike a traditional CD which comes with a fixed APY for the length of the term, a bump-up CD lets you request an interest rate increase if the bank has also raised its rates. This way, you can continue saving at a higher APY.

Rates on financial products can go up and down in response to changes in the Federal Reserve's benchmark rate. In times of high inflation, the Fed might choose to hike up the rates to tamp it down. As a result, financial institutions typically follow suit, raising interest rates on their offerings — including CDs. In this kind of environment, you could take advantage of a bump-up CD and earn a higher rate on your savings.

For example, let's say you put $5,000 in a bump-up CD for two years at 3.50% APY. After the first year, rates increased, and you bumped your APY to 3.75%. Instead of the $356 in interest you'd originally have earned, you'd now earn $550 thanks to the rate increase.

Many bump-up CDs allow for a single increase, but it's possible to find options that let you request a bump multiple times.

Other terms can also vary. A typical bump-up CD term length is two or three years. Further, there may be conditions around how much you can increase the rate at one time or a required minimum deposit to open an account. Finally, most CDs (except for no-penalty CDs) charge a fee if you withdraw the money before the maturity date.

Bump-up CDs vs. step-up CDs

Don't confuse a bump-up CD with a step-up CD, which also allows rate changes. Unlike bump-up CDs, step-up CDs come with automatic increases that the bank schedules in advance.

A combination of all the step-up CD rates is called "blended" APY. This is the overall rate you'll earn over the term. It's a good idea to ensure this rate is well above that advertised on traditional CDs to avoid getting a less favorable APY.

Pros and cons of bump-up CDs

The main advantage of bump-up CDs is the ability to increase the rate within the same CD term. Not being locked into your APY can be especially helpful in a rising rate environment.

At the same time, bump-up CDs tend to have lower APYs than traditional CDs to begin with. This way, the financial institution protects itself against future rate bumps you may request. Considering this, you might do better with a regular CD.

First National Bank of America CD

First National Bank of America is a Member FDIC.
  • Annual Percentage Yield (APY)

    Online deposit rates from 4.55% - 5.15%* APY

  • Terms

    From 12 months to 84 months

  • Minimum balance

    $1,000 to open and start earning interest**

  • Monthly fee

    None

  • Early withdrawal penalty fee

    FNBA does allow partial withdrawals. The penalty charged is based on the term of your Certificate of Deposit. The penalty may result in a reduction of your principal balance.

Terms apply.

*Annual Percentage Yields (APY) are subject to change without notice. Fees could reduce earnings on the account. A withdrawal will reduce earnings. 

**$1,000 minimum balance to obtain the APY. The APY on all certificates assumes that principal and interest will remain on deposit until maturity. A penalty may be imposed for early withdrawal.



CFG Community Bank CDs

CFG Bank is a Member FDIC.
  • Annual Percentage Yield (APY)

    From 4.40% to 5.50% APY

  • Terms

    From 12 months to 60 months

  • Minimum balance

    $500 to open and start earning interest

  • Monthly fee

    None

  • Early withdrawal penalty fee

    Early withdrawal penalty depends on the term length; withdrawing within six days of account opening will cost you a 7-day interest penalty

Terms apply.

Ally Bank® CDs

Ally Bank® is a Member FDIC.
  • Annual Percentage Yield (APY)

    From 3.00% to 4.85% APY

  • Terms

    From 3 months to 5 years

  • Minimum balance

    None

  • Monthly fee

    None

  • Early withdrawal penalty fee

    High Yield CDs and Raise Your Rate CDs have early withdrawal penalties that vary based on your CD term. With the No Penalty CD, withdraw all your money any time after the first 6 days following the date you funded the account and keep the interest earned with no penalty.

Terms apply.

Additionally, bump-up CDs aren't as common as traditional ones. This means less competition among banks to offer the best terms and fewer options to choose from.

Finally, taking full advantage of a bump-up CD requires a mixture of luck and strong awareness of market conditions. You need to be able to successfully speculate whether rates will go up during the CD's term, which is never a guarantee.

Plus, even if rates rise, it can be tricky to find the right time to make a move. For instance, if you request a bump and rates continue to increase afterward, you'll miss out on locking in an even higher APY.

How to open a bump-up CD

You can open a bump-up CD at a traditional bank, credit union or online bank. Since this type of CD is less common, there's a limited number of institutions that offer it.

Here are some banks that offer bump-up CDs:

When picking which bank or credit union to open a bump-up CD with, compare all the important details, such as the initial APY, maturity term, the number and frequency of increases allowed, minimum deposit requirements and others.

Once you decide on the financial institution, you'll need to fill out an application and deposit the money. The bank will assign you an initial APY which you can then request to increase if rates rise.

Choosing between a high-yield savings account and a bump-up CD

Opening a CD can be a good idea if you're saving for a large purchase because you can rest assured that your money will grow for a predetermined period of time, and there's no risk or volatility. However, you still have to make sure that you are depositing money you definitely won't need for that time period, since you can be penalized for any early withdrawals.

If you prefer an account with easier access to your cash — such as one to use for your emergency fund — a high-yield savings account would be a better fit. Plus, with high-yield savings accounts, there's no limit to how many times your APY could increase. On the flip side, you run the risk of your rate dropping when the Fed rate decreases.

Currently, there are high-yield savings accounts that offer APYs of over 4.00% and charge no monthly fees. Here are CNBC Select's picks of the best high-yield savings accounts:

Compare offers to find the best savings account

Bottom line

If you're looking to maximize your savings when rates are rising, a bump-up CD can be a good option to consider. Unlike traditional CDs, this type of savings account lets you request a bump to your APY while the CD is still maturing and earn higher returns as a result.

At the same time, it's impossible to know for certain how rates will fluctuate. To add to that, it's common that bump-up CDs offer a lower initial APY to hedge against future increases. For those reasons, make sure to also consider other types of CDs and high-yield savings accounts before putting your money in a bump-up CD.

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

Information about the Synchrony Bank High Yield Savings Account has been collected independently by CNBC and has not been reviewed or provided by the bank prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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