Bump Rate CDs: Take Advantage of Rising Rates

Posted on Sept. 7, 2022

IMAGE: Man looking happy while holding cell phoneAfter reducing interest rates and holding them at near zero since March 2020, the Federal Reserve has been aggressively increasing interest rates in 2022. These rate increases are an effort to curb inflation. During the current rising interest rate environment, bump-rate CDs are a unique type of certificate that may help you increase your interest rate over the term of your investment. As interest rates rise, CDs might be a valuable tool for building your savings and as part of your investment strategy.

Here’s a closer look at bump-rate CDs, how they work, and when is the best time to consider using this type of certificate.

What is a Bump Rate CD?

A bump-rate CD is a certificate that gives you the option to increase your interest rate during the certificate term. When you open a bump-rate CD, you get an initial APY, usually lower than a standard certificate rate at the same term. With a bump-rate CD, you can ask your bank or credit union to increase your APY if rates rise. Most bump-rate CDs allow one rate increase during the CD term.

For example, if you open a two-year bump-rate certificate at 2.00% APY and the rate rises to 2.30% APY six months later, you can ask your credit union or bank to increase your rate for the remaining 18 months of your CD term.

When Should You Invest in a Bump-Rate CD?

A bump-rate CD might be a good option for you in our current rising-rate environment. Unlike traditional certificates that lock in the rate for the term, a bump-rate CD allows you to “bump up” the interest rate during your certificate’s term. If interest rates increase during the term of your certificate, you’ll be able to take advantage of the increase and earn a higher yield. You have to request to bump up the rate, it does not happen automatically, and most bump-rate CDs will only allow one rate increase during the term.

In the past several months, federal funds rates have increased four times from nearly 0% during the pandemic to between 2.25% and 2.50%¹, and they are expected to continue to increase.

Like interest rates on loans or credit cards, CD rates depend greatly on the Federal Reserve. When the federal funds rate rises, interest rates for most financial products also rise. In the past several months, federal funds rates have increased four times from nearly 0% during the pandemic to between 2.25% and 2.50%¹, and they are expected to continue to increase.

Disadvantages of a Bump-Rate CD

Bump-rate CDs typically offer a lower APY than a traditional certificate at the same term. If rates decrease or don’t change during the term, a conventional CD offers a better yield since a bump would not be available. Also, if rates continue to climb during your term, you may bump your rate too soon and lose the option for an even greater yield.

Texell’s 48-month Bump Rate CD

Certificates can be a solid vehicle to grow your savings faster with easier access than retirement accounts and better yields than a traditional savings account. Texell offers a 48-month Bump-Rate Certificate that allows you a one-time rate bump during the term. When you exercise the bump option, it will increase to the current rate in effect. To view current rates, visit Texell.org/Rates.

To open any certificate at Texell, a minimum opening deposit of $1,000 is required. Unlike many banks and credit unions, Texell’s certificates are insured for up to $500,000 through a combination of federal and private insurance.² For more information on CDs, visit Texell.org and call or text 254.773.1604.

¹ CD Interest Rates Forecast: How Good Will They Get in 2022? Article from Forbes.com.
² Accounts are insured for up to $250,000 by the National Credit Union Administration (NCUA) and an additional $250,000 by Excess Share Insurance (ESI), for a total of $500,000.

If you wish to comment on this article or have an idea for a topic we should cover, we want to hear from you! Email us at editor@texell.org(opens in a new window).

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