High CD interest rates tend to come around in cycles, based on overall market conditions or on a specific bank's desire to increase its deposit base. However, the high penalties imposed by many banks for early withdrawals make it unprofitable to switch to higher yield investments. Therefore, a number of financial institutions offer new certificates of deposits called "bump-up CDs."
Reset Your CD Rates Higher
Bump-up CDs allow account holders to reset the rates on their certificates at one or more points before their maturity date. If interest rates have risen halfway through the term of a CD, you can opt to receive the higher CD rate for the duration of the term without making a withdrawal or incurring a penalty. However, should interest rates remain the same or go down, you can keep enjoying the preferable rate you locked in at the start of your term.
Buyer's remorse doesn't just happen at the mall. It can happen with any kind of investment that quickly seems to become less valuable than alternatives that emerge over time. For banks, disillusionment with certificates of deposit can lead savers to other investments, from government-backed securities to mutual funds. By maintaining flexibility through a combination of customer service and marketing, banks increasingly rely on bump-up CDs as a source of customer retention.
How Bump-Up CDs Boost Yields Without Risk
CD interest rates can jump significantly when a bank wants to become more competitive in a market or when it needs liquidity to respond to market events. Thanks to FDIC insurance, depositors can rest assured that an overly aggressive bank's marketing strategy won't result in a loss of their savings. Therefore, you can use competition in the banking world to your advantage by requesting a bump-up CD from your account manager.
Bump-up CDs appeal to investors who prefer long-term yields to short-term liquidity. Banks like to offer these new products because they can lock in deposits for longer periods of time. In most cases, deposits from bump-up CDs help fund mortgages and small business loans in communities where accounts are opened. This way, investors can enjoy stability while helping their local economies.
Current CD interest rates that don't look particularly appealing to long-term investors might still be preferable to riskier investments. By using bump-up CDs as part of a diversified savings portfolio, you don't have to risk feeling that you missed the boat on a sudden opportunity to boost your overall yield.