Are “Raise Your Rate” Type of CDs a Good Deal?

With rates being so low, many savers don’t want to lock their money into a CD. To make CDs more appealing, some banks and credit unions have added a bump feature. This allows the CD customer to bump up the rate one or more times during the term of the CD. The new rate will equal the current rate of the same CD.

One of the best known versions of a bump CD is Ally Bank’s Raise Your Rate CDs. Ally Bank offers two Raise Your Rate CDs. The first is a 2-year CD which gives the customer one option to raise the rate to the existing 2-year CD rate any time during the term. No change is made to the CD maturity date. The second is a 4-year CD which is just like the 2-year Raise Your Rate CD except that the customer gets to bump up the rate two times.

Other institutions offering these bump-up CDs include CIT Bank, Bank5 Connect and NEFCU.

The Wall Street Journal recently published the article, Using the New Rising-Rate CDs, which reviewed these bump-up CDs.

The DA reader me1004 provided some useful warnings about these bump-up CDs in the forum. I thought it would be helpful to repeat his post:

I have found in the past that a lot of banks are just scamming about raising the rates.

One scam they use it to raise the rate ONLY if the new rate on the same term CDs are raised. However, they will make this an odd length term (maybe 13 months, rather than the standard 12 months), and so they don't even offer any other CDs of a similar length, so there never is a rate hike. Or, they do the opposite, they give you a regular term that matches CDs they do offer, but later when they want to raise the rate for, say, the 12-month CD, and they know they have these bmp CDs out there at that term that are linked to that, they instead do not raise the rate for the 12-month CD, instead offer a promo CD of 13 months, and so your rate does not go up.

They use other scams too, so watch out. These are used for pure marketing purposes -- because they sound a LOT better than they are.

Oh, you might find some banks that actually take an honest approach to them. But even those are offering so much lower a rate for these bump CDs than their going rate that you don't come out ahead even if your rate is increased over the term anyway -- so what's the point.

Ally Bank’s Raise Your Rate CDs have the problem described in the last paragraph. The rates are too low as compared to what other banks are offering. The bump-up feature is probably not worth much more than 10 basis points. For example, the current yield of Ally’s 4-year Raise Your Rate CD is 1.30%. The best 4-year CD yield from an internet bank is currently 1.80% at CIT Bank. If rates rise, will Ally’s CD be a better deal? Probably not. Here’s an example that shows why:

Let’s compare CIT Bank’s 4-year Jumbo CD with Ally Bank’s 4-year Raise Your Rate CD. The CIT Bank CD has a 1.80% APY and the Ally Bank CD has a 1.30% APY (as of 5/14/2014).

Let’s assume rates start rising around 18 months from now, and Ally starts increasing its CD rates. After two years, let’s assume the 4-year Raise Your Rate CD yield goes up to 2.00%. The customer then decides to bump up the rate. The rates continue to increase, and let’s assume the CD yield goes up to 2.50% after three years. The customer then decides to request one last rate bump. Below is an estimate of the 4-year average APY of this CD:

• year 0: 1.30% APY
• year 1: 1.30% APY
• year 2: 2.00% APY
• year 3: 2.50% APY
• Average: 1.78% APY

CIT Bank’s 4-year Jumbo CD with an initial 1.80% APY that lasts for the four years would be a better deal than Ally’s Raise Your Rate CD if rates rise as shown above. If rates rise less, CIT Bank’s CD becomes an even better deal.

As DA reader me1004 said, these bump-up CDs often "sound a LOT better than they are."