What Are Bump-Up CDs and Step-Up CDs?

A fixed interest rate is a central feature of many certificates of deposit. When you open a CD at a bank (or a share certificate at a credit union), you lock in a rate that stays the same for the CD’s full term, whether that’s months or years. But two types of CDs allow rate increases midterm: bump-up and step-up CDs. Let’s take a closer look.

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Definition

Bump-up and step-up CDs have a special feature that allows for one or more rate increases during a CD term. A longer CD term may have more rate increases than a shorter term but not always. These types of CDs have similar pros and cons:

• Pro: You can take advantage of multiple rates within the same CD term, which is particularly helpful amid rising rates.

• Cons: Bump-up and step-up CDs are fairly uncommon, which means fewer CD terms and rates are available. In addition, like other CDs, there’s an early withdrawal penalty, which can be three months' to a year's worth of interest (or more).

Here’s how they differ: Bump-up CDs let you choose when to request a rate increase, while a step-up CD lets the bank choose the increases in advance.

Bump-up CDs

Bump-up CDs, also known as “raise your rate” and “bump rate” CDs, let you request a rate increase once or more during a CD term. Two caveats are that your bank must approve the request and the request must occur after the bank has raised rates for newly issued CDs for the same term as your existing CD.

For example, if you have a two-year CD with a 1% annual percentage yield, or APY, and one year later, the bank pushes rates on new two-year CDs up to 3%, you can request the 3% rate for the second half of your CD’s term.

Choose a bump-up CD if: you want some control over rate changes and are willing to check your bank’s rates occasionally to know when to request a bump.

Here are a few banks and credit unions where you can find bump-up CDs (and share certificates):

• Ally Bank (see our Ally CD review).

• Andrews Federal Credit Union (see our review).

• First Tech Federal Credit Union (see our review).

• Marcus by Goldman Sachs (see our Marcus CD review).

• Synchrony Bank (see our Synchrony CD review).

• TIAA Bank (see our review).

Step-up CDs

Step-up CDs have built-in rate increases during a CD term. In other words, the bank decides on the increases in advance and at what frequency they occur as well as what the specific rates for the CD will be. There tends to be a blended or composite APY, which is the overall rate for the full term after factoring in the different rates. The blended APY is what you’d compare with other CDs’ rates you’re considering.

For example, U.S. Bank offers a 28-month CD with a rate increase every seven months, or four times total, starting at 0.05% and ending at 0.65%. The blended or composite APY is 0.35%.

Choose a step-up CD if: you want rate increases to happen automatically and the blended APY is favorable.

Here are a few banks where you can find step-up CDs:

• Citibank (see our review).

• U.S. Bank (see our review).

Another option: Build a CD ladder

The main purpose of getting a bump-up or step-up CD is to reduce a common risk that traditional CDs have: missing out on higher future rates once you lock in a CD. But you can avoid that risk through a strategy called a CD ladder.

Generally, a CD ladder works like this: You split up your investment equally into multiple CDs with staggered terms, such as one-year, two-year, three-year, four-year and five-year terms. Once a CD matures, you can withdraw or reinvest funds into a new five-year CD. If you reinvest each time, you can take advantage of multiple rates without worrying about getting stuck with one potentially low rate.

» Learn more about 3 ways to invest in CDs

Other special types of CDs

If a bump-up or step-up CD is appealing because it has more flexibility than a regular CD, consider a few other types of CDs, too.

• A no-penalty CD lets you make a free withdrawal anytime after the first few days of a CD’s term. Terms tend to be around one year. See the best no-penalty CDs.

• An add-on CD lets you add more money to a CD during a term, something that other CDs don’t allow. See more about the various types of CDs.

Alternatively, consider a high-yield savings account if you’re focused on rates and the flexibility to add and withdraw money over time.