High-Yield vs Bump-Up CDs
Choosing a Low-Risk Investment That Works for You
December 13, 2022
There are a lot of financial and investment products available, including numerous types of certificates of deposit (CD). We break down the differences and the pros and cons of each.
You’ve probably heard of a certificate of deposit (CD), and you might even know what it is. But it gets more complicated when you start looking at the various types of CDs. Common terms in the financial industry include jumbo CD, high-yield CD and bump-up CD, but what are the differences between these various products, and what benefits does each one offer?
What is a CD?
We’re not talking about compact discs, those little silver music albums that were all the rage in the ‘90s. In the financial world, CD stands for certificate of deposit.
A CD is a bank deposit product that usually offers a higher return than a savings account in exchange for leaving your money untouched for a set period of time until it becomes “mature.” Your return on investment (ROI) is based on an annual percentage yield (APY), and the agreed-upon time period is called the term. If you choose to withdraw your funds before the CD’s maturity date, you might incur an early withdrawal penalty.
CDs are considered low-risk because they’re usually FDIC-insured. That means the federal government guarantees you won’t lose your money, up to a max of $250,000 in any given insured bank. So if you personally have multiple accounts in one bank, you’re covered for up to $250K across all your deposits with that bank, as well as the same maximum for your deposits with another bank, and so on.
What is a Jumbo CD?
The term “jumbo CD” simply means that it requires a higher minimum deposit than usual. For many banks, this minimum is $100,000, although it can be as low as $25,000. Because the deposit requirement is higher, a jumbo CD usually also pays a higher interest rate.
High-Yield vs Bump-Up CDs
High-yield CDs and bump-up CDs can both be regular or jumbo CDs. They’re similar financial products with one key difference: one gives you a set rate for your term, and the other allows you to increase the rate one time during your term. Let’s look at each one more closely.
High-yield CDs
High-yield CDs start with the highest possible rate at the outset, and that rate is guaranteed for the CD’s term. The financial institution gets to set its own rates, but you can choose which bank to purchase a CD from based on their advertised rates. If national interest rates go up, or your bank decides to raise its advertised APY for CDs, you’re still locked into your initial contracted rate. So that’s great for you if interest rates go down, but not as good if rates go up.
Once your CD reaches maturity, you can withdraw the funds plus interest, or roll it over into a new CD.
Bump-up CDs
Bump-up CDs may start with a slightly lower rate, but unlike regular high-yield CDs, you don’t have to keep that rate. You usually get one chance during the term to bump up your CD to a higher APY, which remains in effect for the rest of the term.
Depending on your bank, the process to do this is usually very simple. Most likely, you’ll just need to log in to your online account to see if you’re eligible for a rate bump, and then follow the prompts to implement it.
Choosing High-Yield vs Bump-Up CDs
Deciding which type of CD product is right for you is pretty easy. It all depends on where you think the market is going over the next several months to years. Following stock market trends and overall financial news is a great way to figure this out.
If you think interest rates are going down, you should stick with a regular high-yield CD, because that gives you the highest return over the entire term. If you think they’re going up, a bump-up CD gives you more control to ride that wave and take advantage of higher rates that may emerge during your CD term.
CD Rate Guarantees
Not only is your CD from a bank usually FDIC-insured, but you also might get additional rate guarantees. For example, Credit One Bank offers a high-yield jumbo CD and a bump-up jumbo CD. Both come with a 10-Day Rate Guarantee, which means if the APY increases within 10 days of you opening your CD, you’ll automatically get the higher rate instead of what you signed up for.
Both also have a Loyalty Rate Program, which gives you an APY increase of 0.05% over the going rate when you renew your CD. So instead of withdrawing your funds with interest and moving on after your CD matures, you can roll your money into a new CD and keep earning at a higher rate than new account holders.
Interest on all Credit One Bank CDs is compounded daily, calculated using the daily balance method, and credited monthly. This method applies a daily periodic rate—determined by dividing the annual interest rate by 365 days—to the principal amount in your account each day.
If you’re ready to get started exploring Jumbo Certificate of Deposit options, check out the extremely competitive rates offered by Credit One Bank. Choose a High-Yield Jumbo CD for the highest overall APY, or a Bump-Up Jumbo CD if you’d like to take advantage of a rate bump option in the future.
For over a quarter of a century, Heather has been working as a journalist in all media: TV, radio, print, and online. After establishing her career in Toronto, she has been living, working, and playing in Las Vegas for the past decade. She loves pulling apart complicated topics to make them simple, fun, and easy to understand, especially in the business and financial niches. But she also enjoys writing about the personal side of life, including success, relationships, families, and pets. She approaches everything from a yin-yang perspective, so her passion for wordplay and entertaining metaphors is always balanced with an intense (and some would say annoying) focus on facts and accuracy.
This material is for informational purposes only and is not intended to replace the advice of a qualified tax advisor, attorney or financial advisor. Readers should consult with their own tax advisor, attorney or financial advisor with regard to their personal situations.
