Bump, Step and Add Your Way to CD Returns

Find Better CD Returns

It's been a challenging few years for low-risk investors. Certificates of deposit used to offer the guarantee of increased earning potential, but opening a CD in 2012 doesn't give account holders many reasons to celebrate.

However, banks and credit unions have begun to offer new products with greater potential for CD returns. With more flexibility, more liquidity and more ways to break the traditional restrictions of timed deposits, today's CD climate has become more welcoming.

If you're in the market for fixed rates with fewer reasons to feel on edge, here are four ways to get more comfortable with locking your money away.

Keep Piling up Your CD's Principal

For savers who want a CD that functions more like a savings account, some financial institutions have begun offering an add-on or add-to function that allows account holders to contribute more funds before maturity. Instead of locking away a lump sum on account opening day, customers can arrange monthly deposits that increase the principal and therefore a bump in CD returns.

Shawna Thompson, senior product strategy manager of BECU, the Tukwila, Wash.-based credit union, says that the add-on CD option makes a great match for consumers who are saving for specific expenses with set dates, such as annual property tax dues.

Thompson says the option provides a way for consumers to learn how to save with self-discipline through automatic monthly transfers that cannot be withdrawn without paying a penalty.

"We think the add-to option provides a strong way to help our members understand how to save more," Thompson says.

Exercise for CD Rate Bump

While traditional CDs lock account holders in to one set rate, bump-up CDs give account holders the ability to raise their interest rates.

The ability to increase your earnings potential in the middle of a term can be attractive, but knowing when to exercise that rate increase can be challenging. Thompson recommends paying close attention to when the Federal Reserve raises the federal funds rate.

"Keep your finger on what's going on in the economy," Thompson says.

Some institutions send customers notifications when the bank's rates rise on savings and investment instruments. Beth Coggins, spokeswoman at Midvale, Utah-based Ally Bank, says account holders can schedule alerts when rates cross a certain threshold.

However, today's sluggish market means that CD rates may not reach much higher. While raising your rate sounds like a winning scenario, consumers often wait too long to actually utilize a rate increase on bump-up CDs, says Ryan Bailey, senior vice president of TD Bank.

"Bump-up CD holders typically hold out hope that rates will rise, but we're in a flat-rate environment," Bailey says. "Before you know it, the CD is ready to renew, and you never had the chance to raise your rate."

Step in a Positive Earning Direction

While bump-up CDs require timing the market and being aware of interest rate shifts, Bailey says that step-rate, or step-up, CDs provide predictable annual increases.

"CD buyers generally like the certainty of CD rates," Bailey says. "Step-rate CDs provide the certainty that your rates will climb over time."

The frequency of rate increases varies with the financial institution. While some banks offer step-rate CDs that increase every six months, similar CDs may only increase once each year.

Regardless of how often predetermined increases go into effect, account holders can use the schedule of interest rates and the principal deposit to calculate their earnings before opening a new step-rate CD.

Live Carefree and Penalty-Free

Traditional CDs come with one heavy piece of baggage: a penalty for removing money before maturity. Today, many banks and credit unions are offering CDs that lighten that load. While interest rates and CD returns for no-penalty CDs are typically lower than traditional CDs, account holders benefit from the assurance that they will not lose a penny of their principal.

For consumers who worry that they may need their money before the end of the term, TD Bank's Bailey says that no-penalty CDs provide the benefit of a small earnings bump with the additional perk of easy access to money.

"If you have concerns about job security or the economy in general, a no-penalty CD can make a great choice," Bailey says.