What Is a Step-Up CD?

Step-Up CDs Explained

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Definition

A step-up CD is a type of certificate deposit (CD) with an interest rate that increases over time. A traditional CD typically has the same interest rate for its duration.

Key Takeaways

  • A step-up CD is a certificate of deposit with an interest rate that increases on a fixed schedule throughout the term of the CD.
  • Step-up CDs disclose rate increases ahead of time, and they are enacted automatically, so you know upfront how much you’ll earn overall.
  • If the blended APY of a step-up CD is higher than the interest rate on a regular CD, then the step-up CD will earn more money.

Definition and Examples of a Step-Up CD

A step-up CD is a certificate of deposit (CD) in which the interest rate gradually increases or “steps up” as time goes on. It is a type of variable-rate CD.

One of the biggest disadvantages of a traditional CD is that you’re locked into a set interest for the life of your term. However, with a step-up CD, your rate automatically increases over time, so you can take advantage of rising interest rates.

  • Alternate name: Step-rate CD

You'll hold a step-up CD for a set period of time, such as six months, one year, or five years. Your step-up CD will gradually increase its interest rate over time, usually on a fixed schedule. For example, U.S. Bank offers a 28-month step-up CD. Its interest rate goes up every seven months. The rates are locked in, so you know what each increase will be, as well as when they will happen.

How Does a Step-Up CD Work?

Like a regular CD, you can open a step-up CD with any bank or credit union that offers one. Once it is funded, that money gets locked away until it reaches “maturity.” This is based on how long the CD is for, such as six months or 10 years. CDs with later maturities have higher interest rates.

But unlike traditional CDs, which have the same interest rate for the life of your term, step-up CDs have interest rates that incrementally increase over time.

The increases are locked in ahead of time. This means you know upfront when your rate will rise and by how much. For example, TD Bank has a five-year step-up CD with rates that increase 0.05% every year. In the first year, the interest rate is 0.05%. By the fifth year, the interest rate is 0.25%.

Note

Some banks may list at "Blended APR" with their step-up CDs. This APR is the average of all the steps of interest in your step-up CD.

Is a Step-Up CD Worth It?

The best way to know if a step-up CD is worth it is to compare its blended annual percentage yield (APY) to that of a traditional CD. This tells you how much interest you’ll actually earn over time. Suppose you’re trying to decide between a traditional CD that earns a 0.4% APY and a step-up CD with the following rates:

  • 0.05% for the first seven months
  • 0.25% for the next seven months
  • 0.45% for the next seven months
  • 0.65% for the next seven months

On the surface, you may think the step-up CD is the better option. After all, its APY goes all the way up to 0.65%. However, when you average these rates together, the blended APY is only 0.35%. This is less than you would earn with the traditional CD. In this case, the step-up CD wouldn’t be worth it.

An additional factor to consider is that most CDs will charge you an early withdrawal fee if you withdraw some or all of the money before the CD matures.

Step-Up CD vs. Bump-Up CD

Step-up CDs and bump-up CDs both come with rate increases, but that’s where the similarities stop.

Step-Up CD Bump-Up CD
Rate increases at regular intervals throughout the term length Rate can only increase once throughout the term length, and it’s at random
The bank increases your rate automatically; you don’t have to contact them first You have to request the rate increase with your bank

With a step-up CD, your bank automatically increases your rate for you on a set schedule. Both the rate increase and the time when those increases happen are fixed for the life of the CD.

With a bump-up CD, you have to notify your bank and request a rate increase. You can typically only request an increase one time throughout the entire term. So, if your rate jumps up to 0.7% and you request an increase, you can’t request another one if it then jumps up to 1% six months later.

Note

A bump-up CD may also be called a "jump-up" CD, "trade-up" CD, or "raise-your-rate" CD.

Always read the fine print when comparing step-up CDs because they’re not all equal. For example, Southeast Bank offers what it calls a "step-up CD." But when you read the fine print, it’s actually more like a bump-up CD. You have to initiate the rate increase, and you can only do it once.

Pros and Cons of a Step-Up CD

Pros
  • Interest rate increases periodically

  • You don’t have to request any increases

  • Safe investment

Cons
  • May earn less interest than a traditional CD

  • Not offered by all banks

  • Early withdrawal penalties usually apply

Pros Explained

  • Interest rate increases periodically: The biggest benefit of a step-up CD is that your rate increases throughout the length of your term. You also know ahead of time when it will increase and by how much, so there are no surprises.
  • You don’t have to request any increases: Unlike bump-up CDs that require you to call your bank for a rate increase, step-up CDs are increased automatically.
  • Safe investment: Step-up CDs are FDIC insured up to the federal limit. You’re not at risk of losing your money as you are with stock-market investments.

Cons Explained

  • May earn less interest than a traditional CD: A step-up CD seems like a good deal on the surface because the ending APY is often higher than what you’d earn with a regular CD. But when you average all the rates together to get the blended APY, it doesn’t always earn you more money.
  • Not offered by all banks: Step-up CDs aren’t nearly as popular as traditional CDs. You may have to do more research to find a decent one that’s worth your time.
  • Early withdrawal penalties usually apply: The same early withdrawal penalties that you find with a regular CD apply to step-up CDs. You need to weigh ahead of time if you can comfortably lock your money until maturity.

Note

TD Bank’s step-up CD comes with one penalty-free withdrawal each year on your account’s anniversary date.

Alternatives to a Step-Up CD

If you’re on the fence about opening up a step-up CD, there are different options to consider.

CD Ladders

A CD ladder is a strategy of setting up multiple CDs, each with different rates and maturity dates. For example, you could open a six-month, 12-month, and 18-month CD all at once. As they begin to mature, you can decide if you want to withdraw the money, renew the CD with your current bank, or shop around for better rates. This means that every six months, you have access to some of your money.

U.S. Treasury Inflation-Protected Securities (TIPS)

U.S. Treasury Inflation-Protected Securities (TIPS) are a type of bond that rises alongside the Consumer Price Index. It’s a great alternative if you want to protect your money against rising inflation without having to lock it up in a CD.

High-Yield Savings Account

A high-yield savings account can be a good alternative to a step-up CD if you want to be able to access your money at any time. This can be a good choice if you are saving for an emergency fund, vacation, or a down payment on a house.

You’ll earn a higher interest rate than you would with a checking account. You’ll also be able to make six withdrawals a month.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Nevada Secretary of State. "Calllable CD Checklist." Accessed Feb. 7, 2022.

  2. Consumer Financial Protection Bureau. "The Interest Rate Offered for CDs (Certificates of Deposit) Is Low. Is There Anything I Can Do About That?" Accessed Feb. 7, 2022.

  3. U.S. Bank. "Step-Up CD." Accessed Feb. 7, 2022.

  4. Consumer Financial Protection Bureau. "The Interest Rate Offered for CDs (Certificates of Deposit) Is Low. Is There Anything I Can Do About It?" Accessed Feb. 7, 2022.

  5. TD Bank. "TD Step Rate CDs." Accessed Feb. 7, 2022.

  6. U.S. Bank. "Lock in a Higher Rate One Time During Your Initial Term." Accessed Feb. 7, 2022.

  7. Treasury Direct. "Treasury Inflation-Protected Securities (TIPS)." Accessed Feb. 7, 2022.

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