Key takeout
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The Step-Up CD features a pre-determined rate increase, allowing you to automatically increase your APY at scheduled intervals during the period.
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Unlike bump-up CDs, which require you to request an increase in rate, step-up CDs offer guaranteed rate hiking without the need for action.
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Step-up CDs usually start at a lower initial rate than traditional CDs, and blended APYs often fall below standard CD rates.
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These special CDs are provided by fewer banks and usually require a higher minimum deposit ($1,000-$2,500).
The Step Up CD is a specialized deposit certificate that comes with a pre-determined rate rise calendar, which automatically increases yields at scheduled intervals during the period.
This sounds appealing, but who doesn’t want a guaranteed rate increase? – Step-up CDs often start with a significantly lower initial rate, and their mixed yields are usually not as high as those earned on traditional CDs or other savings accounts.
If you are looking for predictable returns without risk of market volatility, a step-up CD may look attractive. However, understanding how they work compared to other savings options is important before committing your money over months or years.
What is a Step Up CD?
Step-up CDs work like traditional CDs, but include a given rate increase that occurs automatically at certain intervals. Instead of locking at one fixed rate for the entire semester, opening an account will gradually increase the APY depending on the established preset schedule.
For example, a typical step-up CD might work as follows:
- First 6 months: 0.30%Apy
- Next 6 months: 0.40%Apy
- Next 6 months: 0.50% apy
- The last six months: 0.60%Apy
A rate rise is guaranteed, but overall returns are often disappointing when compared to alternatives.
Step-up CDs sound great in theory, but maths usually don’t work in your favor. Banks start you at a very low initial rate, so even if you increase, you often earn more than using a standard CD or a high-yield savings account.
– Hannah Holbus, certified financial planner at Bankrate
How a Step Up CD works vs. Bump Up CD
Step-up CDs are sometimes called bump-up CDs. But in reality, they are two different products.
Step Up CD
- The automatic rate increases At a given interval
- Guaranteed Schedule Prepaid
- No action required From the account holder
- Decrease in the initial rate To compensate for the guaranteed increase
Bump Up CD
- Options rates increase What you need to request
- Only if is available Banks will raise fees for new CDs
- Limited opportunities (Normally 1-2 bumps per semester)
- Higher initial rate Because there is no guarantee of an increase
Both types appeal most during the rising interest rate environment, but the Step-Up CD removes guesswork for rising timing rates.
Step-up CD function
The distinguishing features of Step Up CDs can help you determine whether they are suitable for deposits.
- Decreased initiation rate: Step-Up CDs compensate for the guaranteed rate rise by starting with APYs that are significantly below the market rates of traditional CDs. This means that if revenues decline early in the semester, you are essentially paying for the promise of future growth.
- Predicted increase: Rate schedules are modified when you open an account and provide full transparency about future rates. However, these increases may not correspond to wider market rate movements.
- Highest Minimum Opening Deposit: Most step-up CDs require a minimum deposit of between $1,000 and $2,500 compared to many traditional CDs that don’t have a minimum amount or require only $500.
- Limited availability: Few banks offer step-up CDs compared to traditional CDs, limiting competitive rates and favorable terms options.
- Early withdrawal penalties: Like most CDs, step-up CDs usually have penalties for early withdrawal of either fund. Depending on the duration of the CD term, you may need to lose interest for a certain number of months.
Pay attention to mixed yield
The most important factor when evaluating step-up CDs is blend yield. This is a valid APY that you earn over the entire period when occupying all rate periods.
For example, a 28-month step-up CD could advertise speed increases from 0.05% to 0.65% APY, while the blend yield could be just 0.35% APY.
This blend rate is actually important to your return and is not the final rate you will earn in the final period.
Alternatives to Step-Up CD
Before committing to a step-up CD, consider these alternatives that often offer better returns.
Make a CD ladder: If your CD is suitable for your portfolio and you are worried about lower fees, consider building a CD ladder. Funds are deposited on multiple CDs at the same time under different conditions. Once the short-term CDs are mature, update them or replace them with new ones. At the same time, you may have long-term CDs in the mix, which may pay higher yields than short-term CDs.
Check out the penalty CD: The penalty CDS does not offer rate increases, but will not even charge an early withdrawal penalty if you need money earlier than expected or find a better option with a higher yield.
Open a high-yield savings account or money market account. The best high income savings accounts and money market accounts offer competitive rates of return and allow you to withdraw money without penalties (though there may be a limit to the number of transactions). The rates for both types of accounts fluctuate, meaning that you can go up and down at any time, but you can see that these savings products at online banks have a significantly higher potential for revenue than step-up CDs.
Conclusion
Step-up CDS presents an attractive concept – a guaranteed rate increase over time – but rarely offers a competitive return in practice. The combination of low initial rates and modest increases typically results in mixed yields ranging from traditional CDs, high-yield savings accounts, and other alternatives.
“Like an umbrella on a rainy day, bump-up and step-up CDs tend to appeal most in an upward interest rate environment,” says McBride of Bankrate.
Guaranteed to increase guaranteed rates and higher rates can sound like great news. Make sure to compare all options before committing to terminology.