Certificates of deposit are among the safest investments you can make. They are not dependent on the stock market, they are protected by deposit insurance and they have clear terms that you understand. A bump-up CD, also known as a step-up CD, has the potential to provide the same high level of stability while allowing you to take advantage of a rising rate environment. Let’s see what booster CDs are, how they work, and if they’re the best option for you.
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CD Bump-Up Definition
First, let’s define what an ordinary CD is. A CD is a savings account that holds your money for an agreed period of time. At the end of this period, your money is returned to you with an agreed amount of interest. If you withdraw your money before the end of the agreed period, you will pay a penalty.
A booster CD works on the same principle, but you have the option of increasing the interest rate over the life of the CD – bumping it up, if you wish. Some CDs only offer one chance to increase your rate, while others may have a longer lifespan and offer more than one chance to increase it.
An increase CD is designed to allow customers to take advantage of rising CD rates without having to cash in their CD, swallow the penalty, and put their money back into a new, higher interest CD. But due to the boost option, this type of CD usually offers a lower boot rate than a traditional CD.
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How does a Bump-Up CD work?
Let’s look at a simple example of a CD bump-up. You put your money in a CD-ROM with a maturity date of 24 months and a starting interest rate of 1.5%. After 12 months, CD rates at the bank that holds your CD increase to 2%, and you use your increase option to increase your rate to 2% for the remaining 12 months.
This simplified example of a bump-up CD shows some of the benefits of a bump-up CD: You can earn an improved interest rate in one of the safest and most predictable savings vehicles available.
Is a Bump-Up CD right for you?
While a CD is a great way to earn interest, and a replacement CD might seem like a great way to maximize your earnings, it might not be the best choice in all scenarios. Let’s take a look at three things to consider before putting your money into a bump-up CD.
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Bump-up CDs may not earn more than traditional CDs. As mentioned above, although bootable CDs offer the option of higher rates, they often start you off at a lower overall rate. Suppose in the scenario above, where a replacement CD allowed you to switch from a 1.5% interest rate to a 2% interest rate halfway through the life of the CD , you had the option of subscribing to a traditional CD for the same duration. at an interest rate of 1.9%. You would save less over the life of the replacement CD than you would have with the traditional CD.
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Interest rates may continue to rise after your increase. Let’s say that in the scenario above, one month after taking your bump, rates go back up to 3%. Interest rates are hard to predict, and if your timing isn’t right, it could mean staying for several months at a less competitive rate.
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The terms of a CD may not be suitable for you. CDs, whether amplified or not, are not for everyone. Overall, CDs may not offer enough flexibility for some savers due to the fact that your money is locked away for a set amount of time, and if you need to access them, you’ll likely lose a good chunk of the interest you’ve earned. by having it on a CD in the first place. CDs can also require high minimum deposit amounts to secure competitive interest rates, which again might be too illiquid for some.
THE Conclusion
An increase CD can be a great choice in a rising interest rate environment, allowing you to take advantage of a secure savings option while still having the flexibility to raise your interest rate. On the other hand, boost CDs can leave you behind if rates continue to rise after your boost and have other limitations that might not make them suitable for everyone.
Saving tips
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For more help determining which CDs or other investment vehicles are right for you, consider working with a financial advisor. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three approved financial advisors who serve your area, and you can have a free introductory call with your advisor to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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Putting your money in a savings account rather than a CD may be a better choice if you want more flexibility. Just be sure to look for a high-yield savings account so your money is always working for you.
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Want to know how fast your savings will grow over time? Check out SmartAsset’s savings calculator to see how big your savings account will be in a few years, the impact interest will have on your savings and more.
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What is a Bump-Up CD and how is it used to increase your APY? appeared first on SmartAsset Blog.