Considering A Bump-Up Certificate of Deposit?

The key appeal of a certificate of deposit (CD) is that - for the most part, as compared to other forms of investments - it offers predictable and risk-free return on your money. That's because a simple formula takes the amount that you're investing, the length of time you're applying it and your interest rate and tells you the exact total you can expect at the end date of the agreement, also known as maturity. Furthermore, it's a safe choice because this type of account is insured by up to $250,000 by the FDIC.

So it may not make sense to many investors to change the security and outcome of the situation by choosing a bump-up certificate of deposit (which may also be called a variable rate certificate of deposit). What this means is that your interest rate can be adjusted during the length of the agreement, which also changes the total you can expect to make in a way that you can't necessarily guarantee at the time you sign off on the agreement. Essentially, the idea is that you'll stand the chance to make more over the same unit of time.

How it works is that whenever the bank's rates might go up during the length of your agreement, you can appeal for your interest rates to go up to meet the current offer. Sometimes you can gain only one adjustment, if not a few. When you adjust is pivotal, because an earlier bump-up can mean more accrual over time, but a later bump-up may be higher. These rates are usually adjusted according to how the market is doing as well as how well the bank itself is doing. If you think that the economy or money market is going to do well during the length of your contract, you may wish to choose this option (which is not offered by all institutions that offer a certificate of deposit).

There are also a few trade-offs involved. In some cases, the bump-up option is only available for a certificate of deposit of a certain length or amount. For example, instead of taking an agreement for a few months, you may need to sign off on investing your money for several years. The original interest rate offered may also be lower than usual to start with since you stand the chance of gaining higher interest than the average over time. Consider all of the potential pros and cons of accepting a bump-up offer before signing off on your certificate of deposit.

TM Murphy is a professional writer who lives in NYC. She currently specializes in fashion, beauty, marketing and finance articles. For easy-to-understand financial and banking advice to use on topics such as a certificate of deposit, she often turns to http://www.discoverbank.com. TM Murphy has been writing full-time since 2006, when she graduated with a B.A. in English from Northeastern University.

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