Key Takeaways
- Step-up CDs feature predetermined rate increases that automatically boost your APY at scheduled intervals throughout the term.
- Unlike bump-up CDs that require you to request rate increases, step-up CDs provide guaranteed rate hikes without any action needed.
- Step-up CDs typically start with lower initial rates than traditional CDs, and the blended APY often remains below standard CD rates.
- These specialty CDs are offered by fewer banks and generally require higher minimum deposits ($1,000 to $2,500).
A step-up CD is a specialized certificate of deposit that comes with a calendar of predetermined rate increases, automatically boosting your yield at scheduled intervals throughout the term.
While this sounds appealing — who doesn’t want a guaranteed rate increase? — step-up CDs often start with significantly lower initial rates, and their blended yields typically fall short of what you’d earn with traditional CDs or other savings accounts.
If you’re looking for predictable returns without the risk of market volatility, step-up CDs might seem attractive. But understanding how they work compared to other savings options is crucial before committing your money for months or years.
What is a step-up CD?
A step-up CD functions like a traditional CD but includes predetermined rate increases that occur automatically at specific intervals. Instead of locking in one fixed rate for the entire term, your APY gradually increases according to a preset schedule established when you open the account.
For example, a typical step-up CD might work like this:
- First six months: 0.30% APY
- Next six months: 0.40% APY
- Next six months: 0.50% APY
- Final six months: 0.60% APY
While the rate increases are guaranteed, the overall return often disappoints when compared to alternatives.
Step-up CDs sound great in theory, but the math usually doesn’t work in your favor. Banks start you at such a low initial rate that even with the increases, you’re often earning less than you would with a standard CD or high-yield savings account.
— Hanna Horvath, Certified Financial Planner at Bankrate
How step-up CDs work vs. bump-up CDs
Step-up CDs are sometimes referred to as bump-up CDs. But in reality, they’re two different products.
Step-up CDs
- Automatic rate increases at predetermined intervals
- Guaranteed schedule known upfront
- No action required from the account holder
- Lower initial rates to compensate for guaranteed increases
Bump-up CDs
- Optional rate increases that you must request
- Available only if the bank raises rates for new CDs
- Limited opportunities (typically 1-2 bumps per term)
- Higher initial rates since increases aren’t guaranteed
Both types appeal most during rising interest rate environments, but step-up CDs remove the guesswork about timing rate increases.
Step-up CD features
Here are the distinguishing features of step-up CDs that can help you determine whether it’s a fit for your deposits.
- Lower starting rates: Step-up CDs compensate for guaranteed rate increases by starting with APYs significantly below market rates for traditional CDs. This means you’re essentially paying for the promise of future increases with reduced earnings early in the term.
- Predetermined increases: The rate schedule is fixed when you open the account, providing complete transparency about future rates. However, these increases may not keep pace with broader market rate movements.
- Higher minimum opening deposit: Most step-up CDs require $1,000 to $2,500 minimum deposits, compared to many traditional CDs that have no minimum or require just $500.
- Limited availability: Fewer banks offer step-up CDs compared to traditional CDs, limiting your options for competitive rates and favorable terms.
- Early withdrawal penalties: Like most CDs, step-up CDs will usually have penalties for early withdrawal of any of the funds. You may have to forfeit a certain number of months’ worth of interest, depending on how long the CD term is for.
Beware the blended yield
The most critical factor when evaluating step-up CDs is the blended yield — the effective APY you earn over the entire term when accounting for all rate periods.
For example, a 28-month step-up CD might advertise rate increases from 0.05% to 0.65% APY, but the blended yield could be just 0.35% APY — significantly below current rates on Bankrate’s best CDs.
This blended rate is what actually matters for your returns, not the final rate you’ll earn in the last period.
Expert Insight
“Just because it is slated to increase at regular intervals throughout the term of the CD doesn’t necessarily mean you’re going to end up better off at the other end,” says Greg McBride, CFA and Bankrate Chief Financial Analyst. “It depends on the starting point and the magnitude of the increase.”
Alternatives to step-up CDs
Before committing to a step-up CD, consider these alternatives that frequently offer better returns:
Build a CD ladder: If CDs are a good fit for your portfolio, and you’re concerned about declining rates, consider building a CD ladder. You’ll deposit funds into multiple CDs at the same time with different terms. When the shorter-term CDs mature, renew them or replace them with new ones. At the same time, you’ll have longer-term CDs in the mix that may pay a higher yield than the shorter-term ones.
Look at no-penalty CDs: No-penalty CDs won’t offer a rate increase, but they also won’t charge you an early withdrawal penalty if you need the money earlier than expected or you find a better option with a higher yield.
Open a high-yield savings account or a money market account: The best high-yield savings accounts and money market accounts offer competitive rates of return, and they conveniently allow you to withdraw money without penalty (although there may be restrictions on the number of transactions). While rates on both types of accounts are variable – meaning they can go up or down at any time – you’ll likely find significantly higher earning potential with these savings products at online banks than you will with a step-up CD.
Bottom line
Step-up CDs present an attractive concept — guaranteed rate increases over time — but rarely deliver competitive returns in practice. The combination of low initial rates and modest increases typically results in blended yields that fall short of traditional CDs, high-yield savings accounts and other alternatives.
“Like umbrellas on a rainy day, bump-up and step-up CDs tend to appear and appeal most in a rising interest rate environment,” Bankrate’s McBride says.
A guaranteed rate of return plus a guarantee to boost that rate even higher can sound like great news, but the blended yield of a step-up CD might be much lower than traditional CDs or other deposit accounts. Be sure to compare all your options before committing to a term.
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