Guide: Liquid CDs, Bump-up CDs, Step-up CDs, Callable CDs

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CDs are tried-and-true savings tools, but they’ve evolved over time. You’ve got a variety of options to choose from, and you can tailor your CDs to meet your needs and address your concerns. Especially in a rising rate environment, it’s critical to understand how CDs work.

  • Interest rate: How much do you earn, and how do different features affect the rate?
  • Rising rates: Can you earn more if interest rates rise?
  • Withdrawal flexibility: Can you pull funds out whenever you want?

As you evaluate CDs, it may pay to look beyond traditional CDs. But notice how adding features (like withdrawal flexibility or the ability to increase your rate) typically means you earn less on your savings.

For now, we’ll look at four types of CDs:

  1. Liquid CDs
  2. Bump-up CDs
  3. Step-up CDs
  4. Callable CDs

Liquid CDs

Liquid CDs are probably the most popular option because they allow you to pull money out early—before the CD’s maturity date. That flexibility is helpful if you need money for emergency expenses, or if you find a better interest rate on a different CD.

Lower rates than standard CDs: Flexibility defeats the purpose CDs, so banks tend to pay less on liquid CDs than they pay for standard CDs with early withdrawal penalties.

When you can withdraw: Liquid CDs typically allow access to your cash after seven days or so.

Withdrawal amounts: Different banks have different rules for how much you can withdraw, and when. Some allow you to withdraw your full account balance after the initial waiting period. Others may limit your withdrawal to a percentage of your account.

How often? Banks may also limit how frequently you can remove funds from a liquid CD. Some allow only one penalty-free early withdrawal. Others require you to spread out withdrawals. For example, you may be able to take penalty-free withdrawals once per month, or once per year. The most generous banks allow you to take multiple withdrawals anytime you want.

Bump-Up CDs

If you hate the idea of locking up your money at a low interest rate, a bump-up CD may be appealing to you. Those CDs allow you to request a higher interest rate if rates rise. The idea is to keep your money at the bank—instead of letting you jump ship like you can with a liquid CD—so these CDs should pay more than liquid CDs.

How to get a higher rate: Just ask. If the bank offers higher rates on a select group of CDs (like the bump-up CD you’re using), you can request an increase. The process is not automatic, so learn how your bank handles these requests.

How often? Bump-up CDs typically offer one increase per term, so you need to decide when is best to ask for a new rate. That said, some banks allow multiple increases on longer-term CDs. For example, Ally Bank allows one increase on two-year CDs, but you get two opportunities with four-year CDs.

Step-Up CDs

Step-up CDs automatically raise your interest rate at regular intervals. They start with a relatively low rate, but the rate changes over time.

Compare to a bump-up CD: With a bump-up CD, you have the potential to earn a higher rate, but you need to request the rate increase—which might not ever be available. With a step-up CD, the increase should be automatic and guaranteed at issue.

A gimmick? Unfortunately, step-up CDs can be more about marketing than high-interest rates. They’re not very common, and the current offerings are not particularly competitive. For example, U.S. Bank offers a 28-month step-up CD with the following schedule:

  • 0.10 percent for the first seven months
  • 0.30 percent for the next seven months
  • 0.50 percent for the next seven months
  • 0.70 percent for the next seven months

The blended rate (that you actually earn after maturity) is more like 0.40 percent. So why not just make it a 28-month CD that pays 0.40 percent? At the same time, Ally Bank’s Raise-Your-Rate CD pays a flat 2.6 percent for 24 months. Whenever banks play games to make your rate appear higher, it’s best not to play along.

Callable CDs

Callable CDs are different from the offerings above—which seemingly provide benefits to customers. Instead, callable CDs benefit banks. For better or worse, these CDs are also somewhat rare compared to standard CDs and liquid CDs.

Call feature: The bank has the right to cash you out if it makes sense for them to cancel your CD. As a result, you’d receive cash in your account, and you’d no longer earn the CD’s guaranteed rate.

Why do banks call CDs: When you buy a CD, the bank must pay the promised interest rate until your CD matures. If interest rates fall, the bank may feel that you’re earning too much—they can pay lower rates to new customers. As a result, they cash out customers who locked in high rates.

Better rates than standard CDs: Because you risk having your CD called, these CDs should pay more than standard CDs, which allow you to lock in a rate that can’t fall.

When can banks call CDs: Callable CDs typically receive guaranteed interest earnings for a set amount of time (six months, for example). After that call date, the bank may call the CD at any time—and it’s likely to happen if rates fall significantly after you buy a CD.

What do you do with the money: When banks call your CD, you need to find somewhere to put the proceeds. Unfortunately, most of the options available will have lower interest rates. You’re left to choose from CDs and savings accounts in a world with lower interest rates.