Bump-up, step-up or traditional CDs: Which CD account type is better right now?

In today’s uncertain interest rate environment, finding the right certificate of deposit (CD) account is more important than ever. With the Federal Reserve’s ongoing evaluations of economic conditions, rates could fluctuate in the coming months, leaving savers wondering whether to lock in a fixed rate now or choose a CD option that allows for potential rate increases. The decision hinges on your financial goals, risk tolerance, and expectations for future rate movements.

One option gaining attention is the bump-up CD, which allows account holders to increase their annual percentage yield (APY) if market rates rise during the CD’s term. This flexibility can be advantageous in a rising rate environment. Similarly, step-up CDs offer gradual, scheduled rate increases over time, which can provide peace of mind in uncertain conditions. For those who prefer stability, traditional CDs remain a strong choice. 

But while each type of CD has its advantages, it also has its drawbacks, making it crucial to weigh your options carefully and align your choice with your financial strategy.

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Is a bump-up CD better right now?

A bump-up CD is a type of CD account that allows you to capitalize on CD rate upticks by increasing your annual percentage rate (APY) before the account has matured. Your bank determines the rules for your bump-ups, but, in general, you can increase your CD rate if the rate being offered by your bank on the term you chose has increased. 

So, for example, if you open a 2-year CD at a rate of 4.2% and, after one year, your bank starts offering a rate of 4.8% on 2-year CDs, you can opt to increase your rate to what your bank is currently offering. That said, you can typically only increase your CD rate once or twice, depending on your bank’s bump-up CD terms.

The main advantage of opening a bump-up CD right now is that it allows you to boost your APY should rates increase in the future. Given the current uncertainty within the rate environment, that could be appealing to the right type of saver, as there’s always a chance that rates will increase in the future — especially if inflation creeps back up again. 

However, bump-up CDs have a few drawbacks right now, too. First, the starting rates on bump-up CDs may be lower than traditional CDs, so you may have to start with a lower rate initially if you want to take advantage of this feature. And, with the possibility of Fed rate cuts occurring later this year, there’s a chance that CD rates won’t move higher before your CD matures. So, you could end up accepting a lower initial rate and then not have an opportunity to “bump up” your rate down the road.

Secure a top CD account rate now. 

Is a step-up CD better right now?

A step-up CD is a type of CD account that has scheduled rate increases that continue until maturity. For example, a bank may offer a 3-year step-up CD with an interest rate that increases by 0.15 percentage points every six months. So, if you start with a 0.05% APY, you’d get five rate increases of 0.15%, resulting in a final APY of 0.80%. 

The main benefit of opening a step-up CD right now is that the rate you earn will increase on a schedule. With the uncertainty in today’s rate environment, having an account that automatically raises your interest rate on a set schedule could pay off.  

That being said, step-up CDs have a big drawback right now: the starting APYs are typically far lower than rates on traditional CD accounts. So, even with the stepped-up rates, the interest you earn may be far lower than it would be with a traditional account currently. 

Is a traditional CD better right now?

Traditional CDs are CD accounts that come with a fixed rate that stays the same from the day you open your account to the day it matures. Traditional CDs don’t have the rate-change option or features that step-up and bump-up CDs do. 

But despite the lack of extra features, a traditional CD still offers multiple benefits in the current rate environment. To start, banks tend to offer more traditional CD account options than other types of CD accounts, which gives you a wider pool of CDs to choose from. And, traditional CDs have maintained relatively high interest rates across most term lengths. Locking in those rates now protects you against shifts to the overall rate environment, which is important given the uncertainty of where rates could head over time. 

The main drawback of a traditional CD is one it shares with step-up and bump-up CDs: less liquidity. Most traditional CDs have early withdrawal penalties that are charged if you withdraw the money from your account before maturity. That could be problematic if you decide to try and access the funds in your account before your term ends.

The bottom line

When choosing between bump-up, step-up and traditional CDs, it’s essential to consider both the current rate environment and your long-term savings goals. If you anticipate rising rates, a bump-up or step-up CD could provide flexibility, but traditional CDs may offer the best rates upfront and protect against potential declines. Understanding the terms, limitations and potential returns of each option will help you make a more informed decision.

Ultimately, the best CD for you depends on your financial needs and risk tolerance. Whether you prioritize locking in a high rate now or maintaining flexibility for potential increases, carefully reviewing your options will ensure you maximize your savings in today’s unpredictable interest rate landscape.

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Stephen Collopy

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