The most familiar type of certificate of deposit is a traditional CD. These offer a fixed interest rate over a fixed period of time — for example, a 12-month CD with a permanent annual percentage yield of 4%.
But that isn’t your only option when shopping for a CD. Several CDs put a twist on the traditional CD, such as bump-up CDs and step-up CDs.
[Read: Best CD Rates.]
What Are Bump-Up CDs?
A bump-up CD lets you “bump up” to a higher interest rate if the bank is offering one. With most bump-up CDs, you can request a rate bump only one time during the life of the CD.
How Do Bump-Up CDs Work?
To take advantage of a rate bump, you first need to open a bump-up CD with a stated APY and make a minimum deposit.
For example, let’s say you open an 18-month bump-up CD with an APY of 3.75%. Six months after setting up the account, the bank markets an 18-month bump-up CD with an APY of 4.25%. When that happens, you can ask the bank to bump your rate up to 4.25% for the remaining 12 months of your term.
While most bump-up CDs only permit one rate bump, some longer-term CDs might allow two.
Pros and Cons of Bump-Up CDs
Pros:
— You may be able to boost your interest rate at least once during a CD’s term.
— Bump-up CDs tend to offer more competitive rates than step-up CDs.
— Bump-up CDs are more widely available compared with step-up CDs.
Cons:
— APYs are typically lower than those on traditional and variable-rate CDs.
— It may be difficult to find the term you want.
— You’ll need to monitor for rate bump opportunities and consider what’s happening in the broader interest rate environment.
What Are Step-Up CDs?
A step-up CD automatically phases in APY increases at set times during the CD’s term.
How Do Step-Up CDs Work?
A step-up CD is a bit more complicated than a traditional or bump-up CD.
Let’s say you open a step-up CD with a 28-month term. Your rate increases are scheduled when you open the account, and will occur every seven months.
During the first seven months, your rate is 0.20%. Then it climbs to 0.30% for the second seven-month period, then to 0.40% for the third seven-month period, and finally 0.50% for the final seven-month period.
Pros and Cons of Step-Up CDs
Pros:
— You know your rate will go up over the CD’s term.
— Rate increases happen automatically.
— There is more stability with fixed-rate step-up CDs than variable-rate CDs.
Cons:
— There is limited availability of step-up CDs.
— Step-up CDs may offer lower interest rates than other CDs.
— It may be difficult to find the term you want.
More from U.S. News
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Is Now a Good Time to Lock In Certificate of Deposit Rates?
How Do Bump-Up and Step-Up CDs Work? originally appeared on usnews.com
