Making Your Money Last

Give the Brush-Off to Bump-Up CDs

There's a catch to CDs that let you take advantage of rising rates.

By Joan Goldwasser, Senior Reporter

From Kiplinger's Personal Finance magazine, April 2011

With certificates of deposit still paying minuscule yields, a CD that lets you take advantage of rising rates before it matures seems like a no-brainer. But, as always, there may be a catch. Most banks that offer so-called bump-up CDs restrict them to one or two longer maturities. Plus, many banks that sell these CDs restrict them to walk-in customers -- Internet savers need not apply.

Some banks make you jump through hoops to request the higher rate. At Dollar Bank, which has branches near Cleveland and Pittsburgh, you may bump up your rate to that of a higher-rate CD only if the maturity of the higher-rate CD exactly matches the length of time that remains on your CD. By contrast, Ally Bank, an online bank, lets you bump up the rate on its two-year Raise Your Rate CD at any time; the CD currently earns 1.5%, one of the better rates for that maturity.

But the biggest problem with bump-up CDs, says Chris Chantalat, of MoneyRates.com, is that many earn less than ordinary CDs with comparable maturities. (For example, a 15-month Dollar Bank bump-up CD yields 0.3%.) So when you purchase a bump-up CD, you are gambling that rates will rise enough to exceed the spread before the CD's term ends. No doubt rates will rise eventually, but there is no evidence that it will happen anytime soon. Five-year CDs are yielding, at best, about 2.65%. Your safest option for the time being is to avoid bump-up CDs and invest in the highest-yielding CDs with the shortest maturities to give you maximum flexibility when rates finally start going up.

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