What it means
An ordinary certificate of deposit pays a fixed rate for a fixed period and penalises early withdrawal. The weakness is obvious: if rates rise after you commit, your money is stuck earning yesterday's return.
A bump-up CD builds in a one-way escape by letting the saver raise the rate to the issuer's current offer on an equivalent term. The feature is not free, and understanding how it is paid for is the key to the product.
Banks price a bump-up CD slightly below a standard CD of the same term, so the saver effectively buys the option to raise their rate with a small amount of yield given up at the start. Whether that is a good trade depends on how far and how fast rates move, which nobody knows in advance.
The mechanics vary between issuers and the detail is where savers get caught. Most products allow one bump on a term of two or three years, some allow two on a longer term, and almost all require the customer to request it rather than applying it automatically.
The new rate normally applies from the date of the request forward, not retrospectively to the whole term. For a business treasurer parking surplus cash, the product sits in the same family as a laddered deposit strategy.
Splitting cash across several maturities achieves something similar without relying on the issuer's goodwill, so the bump-up is most useful when a single lump sum has to be committed for a set period. The protection it offers is modest but real.
The main nuances are all limits. A bump-up only takes you to the issuer's own posted rate, which may trail the wider market; the right expires unused if you forget it; and the early withdrawal penalty is just as unforgiving as on any other CD.
A step-up CD is a different product altogether, raising the rate automatically on a published schedule.
In practice
Real-world examples.
Example
A retired couple put $80,000 of emergency savings into a three-year bump-up CD because they want certainty but fear being locked in if rates climb. Eighteen months later they request the bump, lifting their rate by 1.25 percentage points for the remainder of the term.
Example
A dental practice sets aside $120,000 for an equipment replacement due in two years and will not risk it in markets. The practice manager chooses a bump-up CD and diarises a quarterly reminder to compare the posted rate with the rate being earned.
Example
A small charity holds a restricted legacy it cannot spend for four years. Its treasurer splits the money between a bump-up CD and two shorter deposits, so some of the funds can be reinvested at market rates and the rest carries the bump as a fallback.
Formula
Calculation
Interest for a period = balance x annual rate x years in that period
Total interest = interest before the bump + interest after the bump
Benefit of bumping = total interest with the bump - total interest if the rate had never changed
Worked example. A saver places $50,000 into a 4-year bump-up CD at 3% a year with one bump allowed, and interest is paid out each year rather than compounded, to keep the arithmetic clear.
Years 1 and 2 at 3% = $50,000 x 3% = $1,500 a year, so $3,000 in total.
At the start of year 3 the bank's posted 4-year rate has risen to 4.5% and the saver exercises the bump.
Years 3 and 4 at 4.5% = $50,000 x 4.5% = $2,250 a year, so $4,500 in total.
Total interest = $3,000 + $4,500 = $7,500
Without the bump the saver would have earned $1,500 x 4 = $6,000, so the bump was worth $7,500 - $6,000 = $1,500.
Had rates never risen, the saver would have earned $6,000 against the $6,400 a standard 3.2% CD would have paid, making the feature a $400 cost in that outcome.Case study
Seen in the real world.
This is an illustrative, fictional scenario. Marlow Bridge Veterinary Group needs to hold $200,000 for three years before a planned building extension and its owners refuse to take any market risk with it. The practice chooses a bump-up CD at 3% rather than a standard CD at 3.25%, accepting $500 a year of forgone interest in exchange for the right to raise the rate once.
The finance manager does the one thing that makes the feature worth anything: he sets a calendar reminder for the first working day of every quarter to check the bank's posted rate against the 3% being earned. Fourteen months in, the posted rate reaches 4.75% and he exercises the bump the same week.
Over the remaining twenty-two months the higher rate earns roughly $6,400 more than the original 3% would have, against the $583 of yield the practice gave up to buy the option. The illustrative lesson the owners draw is that the product only paid because somebody owned the reminder.
Watch out
Common mistakes.
- Assuming the bump happens automatically when rates rise, when almost every issuer requires the customer to ask for it in writing or online.
- Comparing a bump-up CD with a standard CD on headline rate alone and missing that the lower starting rate is the price of the feature.
- Bumping at the first small rate rise and using up the single allowance months before a much larger rise arrives.
Questions
People also ask.
How many times can the rate be bumped?
Most products allow one bump on a two or three year term, with some longer terms allowing two, and the limit is set out in the account terms.
Is a bump-up CD the same as a step-up CD?
No. A step-up CD raises the rate automatically on dates fixed when you open it, while a bump-up gives you the choice of when, or whether, to move up.
What happens if rates fall instead?
Nothing. You keep the rate you opened with for the full term, which is the protection a fixed-term deposit is there to give you in the first place.
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