Certificates of deposit are becoming a more attractive savings option thanks to being a low-risk investment with greater earning power as interest rates continue to rise.
A CD is a fixed-rate deposit account that restricts access to your money for a specified period of time, or term, typically from as short as three months to as long as five years. In exchange for not withdrawing your money before the CD’s maturity date, you’ll earn interest, usually in the form of a higher annual percentage yield than rates you’d find in traditional savings or money market accounts. It’s a great way to lock in a high-yielding rate and earn predictable growth on your investment. The only problem is that once you purchase a CD at a specified rate, you can’t take advantage of higher rates that may occur during the CD’s term. You can take advantage of this conundrum, however, using step-up and bump-up CDs.
What are step-up and bump-up CDs?
As the names suggest, step-up and bump-up CDs are special types of deposit accounts that enable you to lock in an APY while also receiving a rate adjustment in the future. The Federal Reserve has raised the federal funds rate eight times, to its current range of 4.50% to 4.75%, since 2022. Many banks and credit unions have increased rates on their CDs in lockstep with each Fed rate hike.
Step-up CDs earn APYs that increase incrementally according to a predefined schedule within the term. The schedules and rate increases vary among banks and credit unions. Bump-up CDs have rates that can be adjusted to match the bank or credit union’s published APY, generally once per term upon request.
Both step-up and bump-up CDs that are issued at federally insured banks and credit unions are considered safe investments because the accounts are insured against losses of up to $250,000 per depositor by the Federal Deposit Insurance Corporation and National Credit Union Administration, respectively.
How does a step-up CD work?
Like a traditional CD, a step-up CD requires that a lump sum be deposited for a specified term in exchange for a higher rate than a traditional savings account. Step-up CDs differ because the APY has a scheduled rate hike at predetermined intervals and the rates are generally less than you can earn with a traditional CD.
For example, U.S. Bank offers a 28-month step-up CD. The APY increases by 0.20% every seven months, ranging from 0.05% to 0.65% for a blended APY of 0.35%.
| Months | Interest Rate | Blended APY |
| 1-7 | 0.05% | 0.35% |
| 8-15 | 0.25% | |
| 16-23 | 0.45% | |
| 24-28 | 0.65% |
This, obviously, isn’t a high-yielding CD as the average APY for a 1-year CD is 1.59%, according to Bankrate, CNET’s sister site. You can earn well above the rate offered by U.S. Bank if you shop around.
So what’s the benefit of a step-up CD? It can be useful if the blended rate is competitive when compared with lower-yielding traditional CDs. What’s more, it offers other benefits such as no early withdrawal penalties. Step-up CD features vary between banks and credit unions, so be sure to review the terms and conditions of the financial institutions when comparing accounts.
How does a bump-up CD work?
Bump-up CDs require a lump sum deposit to remain in place for a specified term, as with traditional and step-up CDs. However, bump-up CDs generally permit an interest rate adjustment if the bank’s or credit union’s rate changes. In this case, the rate adjustment must be requested by the account holder and is limited to one change per term.
While not as common as traditional CDs, bump-up CDs are more available than step-up CDs, and rates tend to be more competitive than step-ups.
Synchrony Bank offers a 24-month bump-up CD at 3.70% APY, which is 0.60-point less than its traditional 24-month CD at 4.30% APY. However, if Synchrony continues to increase its rates as the Fed continues to raise its own rates, then that 4.30% APY remains fixed for the next two years. Purchasing a bump-up CD now could give you the option to increase the APY if rates rise higher than 4.30% within the next two years.
When should you use a step-up or bump-up CD?
You should purchase either type when you have a lump sum of money and are looking for a safe, fixed-rate savings option, but you want the flexibility that comes with the ability to adjust the APY. Both may be worthwhile if you have money that you’re willing to sock away untouched for an extended period of time. Within the same bank, a step-up or bump-up CD generally offers a higher APY than a traditional savings or money market account. However, comparing these specialty CDs to traditional CDs across other banks and credit unions is important to find the best fit.
Advantages of a step-up CD
- Rate flexibility: Because the rate increments are predetermined, you can compare the blended rate with the posted APY offered from a traditional CD. If the step-up rate increments will yield better growth than the traditional CD, this may be the best option.
- Secure investment: Step-up CDs purchased through federally insured banks or credit unions are insured against losses of up to $250,000 per depositor, per account.
- Guaranteed rates: When compared with a savings or money market account with variable rates, a step-up CD will offer fixed-rate growth and better rates among deposit accounts at the same institution.
Disadvantages of a step-up CD
- Scarcity: Step-up CDs aren’t offered by many banks or credit unions.
- Low rates: Step-up CDs don’t generally offer the most competitive rates when comparing their blended rate to the overall rate offered on other types of CDs.
- Limited terms: Step-up CDs are generally available with a limited number of term options.
Advantages of a bump-up CD
- Availability: Although bump-up CDs aren’t as common as traditional CDs, they’re generally more common than step-up CDs.
- Rate flexibility: Rate adjustments are permitted one time per term. However, you must request the adjustment.
- Secure investment: Bump-up CDs purchased through federally insured banks or credit unions are insured against losses of up to $250,000.
- Guaranteed rates: Rates on a bump-up CD will offer fixed-rate growth and are generally more competitive than step-up CDs.
Disadvantages of a bump-up CD
- Lower rates: Bump-up CDs don’t generally offer the most competitive rates when compared with traditional CDs.
- Manual intervention required: You must request a rate increase to receive a rate adjustment and determine the best time to make the one-time adjustment to maximize your CD’s growth.
- Limited terms: Bump-up CDs are generally available with a limited number of term options.
What is the difference between a step-up and a bump-up CD?
The main difference between these types of CDs is in how rate increases occur. A step-up CD increases the APY according to a set schedule with a predetermined increment. You’ll know the overall blended rate for the step-up CD upon purchase. A bump-up CD provides the option to request a rate increase, generally once per term. The rate will remain constant unless you contact the bank or credit union directly.
Bump-up CDs are more common than step-up CDs. There are financial institutions, such as VyStar Credit Union, that’ll label a specialty CD as a step-up CD. Upon closer inspection, its step-up CD operates like a bump-up CD by permitting one rate increase per term upon request.
Bump-up CDs also generally earn higher rates than the blended APYs available in a step-up CD. When considering a step-up CD, compare rates with bump-up CDs or the more widely available traditional CDs. A paltry incremental increase in rates is no match for a high-yield CD with a competitive APY.
The bottom line
Step-up and bump-up CDs are special types of CDs that require a lump sum of money to remain untouched for a fixed term in exchange for earning a higher yield than traditional savings or money market accounts at the same bank or credit union. Neither are as commonly available from banks or credit unions as traditional CDs, however, they do offer flexibility over traditional CDs to adjust the APY earned within the current term. Step-up CDs earn an incremental increase according to a predetermined schedule. Bump-up CDs generally permit one request for an increase in rates per term.
Step-up CDs tend to be less common and the rates -- even with an incremental increase -- are much lower than higher-yielding options available on bump-up CDs at other banks. Bump-up CDs may offer the flexibility to adjust rates, but you must pay attention to market conditions and request an increase in a timely manner to take advantage of that feature.
If you pay close attention to the changes in market conditions, a bump-up CD would be a great tool to take advantage of in this rising interest rate environment. However, those looking for a set-it-and-forget-it financial product would benefit from locking in the highest yields available today through a traditional CD.
