What Is a Rate Bump CD?

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In the world of savings products, CDs (certificates of deposit) have been a popular place to park money and earn some interest. In fact, CDs usually boast higher interest rates than savings accounts.

In addition to a potentially high interest rate, CDs are often considered pretty safe (thanks to being federally insured) and can have more predictable returns, since your rate is typically locked in when you open one. 

However, maybe having your rate “locked in” isn’t what you’re looking for. Perhaps you like a little flexibility in your rate of return (especially if interest rates go up). In that case, you might consider a rate bump CD.

Rate bump CDs can go by a couple different names, like “raise-your-rate CDs ” or “bump-up CDs.”  No matter what you call it, this type of CD allows you to take advantage of rising interest rates (in the case that interest rates do rise) because you have the option to increase the interest rate during the CD’s term. 

How do rate bump CDs work?

The concept of a rate bump CD can sound a little unusual. As we mentioned earlier, most CDs have a fixed rate for the life of the CD term.

But with a rate bump CD, you get the option to increase your rate of return during the CD’s term.

As with most CDs, the term lengths and minimum deposit amounts for rate bump CDs can vary from one financial institution to the next.

Many rate bump CDs will only let you raise the rate one time during the life of the CD. However, some accounts might allow you to hike your rate more than once. Those rate bump CDs typically have longer terms, so it’s worth weighing the pros and cons of your money being tied up for longer versus scoring multiple rate increases.

Now (unsurprisingly) there might be rules around how much you can increase your rate at a time. Before you commit to an account, check with your financial institution – and do some comparison shopping – to see what’s available.

Rate bump CD example 

Let’s say you open a rate bump CD to help fund a savings goal you have in the next two years. Maybe it’s for a dream vacation, a new car or a home renovation.

Your rate bump CD offers an initial 1% APY. If you funded your CD with $5,000, at the end of the first year that 1% APY could earn $50 from interest.

Now let’s say that over the course of that year interest rates go up, and you want to use your one-time rate increase option to “bump up” your APY from 1% to 1.5%. The difference between that 1% and 1.5% on $5,000 is the difference between $50 and $75.

Is a rate bump CD right for you?

The answer to that question will depend on a few things:

And those are the same factors you’d consider for any CD or savings vehicle.

Another important factor to consider with a rate bump CD: Are interest rates expected to go up in the future? If so, a rate bump CD might be a good option.

If not, you might want to go for a more traditional savings product, or even a No-Penalty CD that would allow you to take your money out early without paying an early-withdrawal fee. (Of course, it can be tough to know for sure if rates are going to rise, even if you stay on top of financial news and markets.)

At the end of the day, if getting to nudge up the rate on your CD sounds appealing, a rate bump CD could make sense in your savings arsenal.

This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.  Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.