Review of Today’s Bump-Up CDs - Is the Bump-Up Feature Useful?

In the last few weeks I’ve noticed a couple of credit unions offering special CDs with bump-up features. Two internet banks have long offered bump-up CDs. Ally Bank has its Raise Your Rate CDs and CIT Bank has its Achiever CDs. The bump-up feature gives the depositor the option to bump-up the rate of the CD during the CD term. The new rate will equal the rate of a new CD. Exercising the bump-up option has no effect on the CD maturity. The bump-up feature can be a good deal for the depositor if interest rates rise, but that’s not always the case.

One possible downside with bump-up CDs is that you pay a price for the bump-up feature with a lower initial rate. Even if you have the opportunity to make use of the bump-up feature, you may have been better off with a regular CD that had a higher initial rate.

Another possible downside with bump-up CDs is that the bank or credit union may not keep the CD rates competitive. If you open a bump-up CD, you’ll have to wait for the bank to increase the rate on that CD so you can make use of the bump-up feature. Even if interest rates are going up, there’s no guarantee that the bank will increase the rate on its bump-up CD.

Even if interest rates rise and the bank maintains competitive rates, it can be difficult to decide when to use the bump option. You typically have one or maybe two bump-up options. So if you use them too early, you can miss out on future higher rates. However, if you wait too long, there won’t be much time left before the CD matures to benefit from the higher rate.

Below is a summary of the bump-up CDs offered by the internet banks Ally and CIT. The banks have kept the rates of these competitive, but you typically can get a higher rate for the same term on a regular CD at another internet bank. To determine if these CDs make sense for you, compare them with CDs at other banks and consider the benefit of these bump-up CDs if interest rates rise in the next few years.

Ally Bank’s Raise Your Rate CDs

Ally Bank’s Raise Your Rate CDs give you the option of increasing your rate to Ally’s current interest rate if it goes up during your term. With Ally’s Raise Your Rate 2 year CD, you have the option to increase your interest rate once; with Ally’s Raise Your Rate 4 year CD you can increase your interest rate twice. I did some analysis comparing this 4-year Raise Your Rate CD with Ally’s regular 5-year CD in this blog post.

One thing to note about Ally Bank’s CDs is that the early withdrawal penalty is going up for new CDs starting on 12/7/13. I have more details in this post.

CIT Bank’s Achiever CDs

CIT Bank’s Achiever CDs include a 1-year and 2-year term with a minimum deposit of $25,000. Both give the customer one rate bump-up option during the term. These also give the customer one chance to make an unlimited add-on deposit. I reviewed these Achiever CDs last year.

Bump-Up CDs at Credit Unions

Last week I posted on two credit unions with special CDs that have a one-time bump-up option which allows you to increase your rate once during the term. Rates are accurate as of 10/28/13.

The first one is the San Francisco Federal Credit Union which is currently offering a 10-month special CD with a 1.00% APY.

The second one is NEFCU in Long Island, New York. It’s offering a special 20-month CD with a 1.25% APY.

My Take

The bump-up feature hasn’t been useful in the last few years with falling rates. That will change if we get into a rising interest rate environment. Of course, the rates on the bump-up CDs may become less competitive in that type of environment.

In my opinion, the bump-up feature makes more sense on longer-term CDs. With short-term CDs, there’s going to be less chance of making use of the bump-up option. Even if rates do go up and you bump-up your rate, there may not be much time left before the CD matures to benefit from the rate bump.