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The main attraction of a certificate of deposit (CD) is its fixed interest rate. Opening a CD in a bank or credit union allows you to lock in an interest rate that remains the same throughout the CD’s complete term, which can be months or years.
Standard CDs focus on locking in that interest rate for the term of the CD. However, bump-up and step-up CDs are a new option in which the interest rate increases over time, following the changes in the market.
Bump-up and step-up CDs allow for increases in the interest rate during the CD’s term. Bump-up CDs allow you to choose when you get a boost, while the bank or credit union chooses the increase in advance for a step-up CD.
Unlike a traditional CD’s fixed interest rate, a bump-up CD will allow a one-time increase in the interest rate, which will lock in until the maturity period ends. A CD with a more extended maturity period, like four years, may allow a second increase in its interest rate.
Bump-up CDs require the deposit holder to request the rate adjustment. For instance, a bank or credit union can offer a CD with a 24-month term and one bump-up option. For example, if the current interest rate is 2 percent and will increase to 2.9 percent in seven months. The seventh month will allow you to bump your interest rate to 2.9 percent to get increased returns for the remaining 17 months.
Whenever the rates decline again, you’ll be able to enjoy the higher interest rate throughout the remainder of the maturity period.
Step-up CDs have interest rates that increase in phases over the maturity period. For example, your certificate of deposit can have an interest rate of 0.5 percent and have a schedule to increase it by 0.1 percent every six months for four years. That way, you’ll have a CD with a 1.1 percent by the end of its maturity period.
In a growing market, a traditional CD with a fixed interest will make you lose out on any potential increase in interest rates. In contrast, getting a bump-up or step-up CD will allow you to increase your interest rate and get better returns after the CD’s maturity period.