Opening a CD usually means locking in a fixed interest rate for the entire term. With a step-up CD, on the other hand, the rate automatically increases at predetermined intervals, giving you the opportunity to earn more as time goes on. And while that might sound like an obvious benefit, step-up CDs come with a few trade-offs to consider before opening one.
How do step-up CDs work?
Step-up CDs have predetermined rate increases that kick in at set intervals. You can typically expect the rate on a step-up CD to start at around 0.05%, increase by up to 0.20% every seven to 10 months, and mature within 30 months.
If you want to compare rates between step-up CDs and traditional CDs, look at the “composite APY” or “blended APY” on the step-up CD. This figure shows you the average rate you’ll earn if you leave your money in the account until it matures.
Right now, step-up composite rates range from 0.10% to 0.35% APY. That’s considerably lower than today’s best CD rates, which hover around 4% APY.
As if that isn’t enough reason to pass on step-up CDs, consider that some of these accounts are callable. That means the bank can close the account before it matures and then give you back your deposit and interest. A callable CD is most likely to be closed if market rates fall below what you’re earning on the account.
Step-up CDs vs. bump-up CDs
Like step-up CDs, bump-up CD rates can increase. However, step-up rates adjust multiple times while bump-up rates usually increase just once, and only if the issuing bank raises its available rates. If that happens, you have to request an adjustment from the issuer. As the investor, that means you’ll need to try and time the market to ensure you get the biggest increase possible.
Both types of CDs are difficult to find, and both offer lower rates than traditional CDs. However, bump-up CD rates tend to be more competitive than step-up CD rates.
Where can I find a step-up CD?
Step-up CDs are not common. Here are a few examples of step-up CDs available today:
- Citibank Step Up CD: This 30-month CD has a $500 minimum deposit, starts at a rate of 0.05% and adjusts up to a high of 0.15%.
- US Bank Step Up CD: Rates increase every seven months on this 28-month CD, and you’ll earn a composite rate of 0.35% APY.
- SouthPoint Financial Credit Union: Terms of 24 and 36 month are available with a $1,000 minimum opening deposit. Both terms earn 3.55% APY.
Are step-up CDs worth it?
Step-up CDs are generally not worth investing in. The rates on these CDs are typically nowhere near competitive, even when you figure in the multiple increases over an account term. With composite APY around 0.35% (and that’s on the high end), your money can earn a lot more in a traditional CD, a high-yield savings account (HYSA), and even in some checking accounts.
Alternatives to a step-up CD
You won’t have any trouble beating the interest rate on a step-up CD. Several other fixed-rate investments and even some bank accounts pay higher returns.
Traditional CDs
For a short-term deposit account that pays a higher rate than a step-up CD, consider investing in a traditional CD.
How much more could you earn by going this route? Frankly, a lot more. For example, a $10,000 deposit will only earn $70 in interest in a 24-month step-up CD with a composite rate of 0.35% APY. However, that same $10,000 deposit would earn $816 in interest in a traditional 24-month CD with 4% APY.
Treasury bills
Another low-risk investment that will pay more than a step-up CD is a Treasury bill. With T-bills, the rate of return is guaranteed up-front, and you can choose terms ranging from four to 52 weeks, with rates of about 3.75% to 4.13%, depending on the term length.
High-yield savings account
Unlike step-up CDs, high-yield savings accounts (HYSA) have variable rates, which means they can go up or down at any time. That said, many HYSAs are still delivering rates over 4% APY.
Money market account
For another bank account that can outperform a step-up CD, try a money market account (MMA). Like HYSAs, the rates on MMAs can drop at any time, but the current national average (0.63%) is nearly twice as high as the composite rate on most step-up CDs, and many banks are still offering up to 4%.
A traditional CD locks in a single fixed interest rate for the entire term. A step-up CD features an interest rate that automatically increases at predetermined intervals (such as every seven to 10 months) over the life of the account.
A step-up CD automatically increases your interest rate multiple times on a set schedule. A bump-up CD usually allows for only one rate increase during the term, and it is not automatic—you must manually request the rate boost when the issuing bank raises its available rates.
Composite APY (or blended APY) is the overall average interest rate you will earn on a step-up CD if you hold it until maturity. Because step-up CDs start with a low initial rate and end with a higher rate, calculating the composite APY allows you to compare its total earning potential against a standard fixed-rate CD.
If a step-up CD is callable, the issuing bank reserves the right to terminate the account before its scheduled maturity date. If the bank exercises this option, it will return your principal along with any accrued interest. Banks typically call CDs when market interest rates fall lower than the rate promised on the account.
Generally, no. Even after accounting for rate increases, the composite APY on step-up CDs (typically ranging from 0.10% to 0.35%) is significantly lower than alternatives like traditional CDs, High-Yield Savings Accounts (HYSAs), and Treasury bills, which currently offer rates around 4% APY.
Manoj Sharma is a Senior Writer on the banking team at Tax Assistant. He provides information on budgeting, bank accounts, the banking industry, and other related topics. Using original data and methodologies, he helps you identify the best financial institutions, accounts, and products tailored to your needs. Manoj holds a degree in Journalism and Political Science from Syracuse University. All articles are strictly reviewed and fact-checked by our panel of expert Chartered Accountants, including CA Devendra Saini, CA Nikhil Khunteta, and CA Ankit Goyal
