Cash News
If you’re looking for a safe place to store your savings while earning interest on your balance, a certificate of deposit (CD) is a great option.
There are many types of CDs, each with their own advantages and drawbacks. One type promises to increase your interest rate at regular intervals throughout the term. These are known as step-up CDs.
When it comes to step-up CDs, however, your earnings may be stunted. Yes, interest rates on step-up CDs increase over time — an alluring feature when deposit rates are otherwise dropping — but the best rates don’t even hit 1% APY before maturing. So before you put your money in a step-up CD, learn more about how it works and which alternatives could be a better choice.
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, but you can easily find a one-year CD with 5% APY or higher.
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 are more competitive, with APYs starting around 4.45% for 18-month terms.
Where can I find a step-up CD?
Step-up CDs are not offered by most banks and credit unions — probably because they’re in low demand. Here are the few options we found:
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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%.
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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.
TD Bank TD Step Rate CD: You can choose a three-year term with 0.10% composite APY or a five-year term at 0.15%. A minimum deposit of $250 is required, and you can make one penalty-free withdrawal each account anniversary.
Are step-up CDs worth it?
Step-up CDs are generally not worth investing in. The rates on these CDs are 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 a 24-month step-up CD with a composite rate of 0.35% APY, but will earn $1,025 in a traditional 24-month CD with 5% 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 currently as high as 4.79% for an eight-week bill.
But let’s say you want to forgo the highest rate in favor of a longer term. Even if you choose the 52-week bill, the current rate of 3.95% easily beats what you get from a step-up CD.
High-yield savings account
Unlike step-up CDs, high-yield savings accounts (HYSA) don’t give you locked-in interest rates. These bank accounts have variable rates, which means they’re likely to fall over the coming year, in tandem with rate cuts from the Federal Reserve. However, even in the wake of the September rate cut, HYSAs are still delivering rates over 5% 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 (0.64%) is nearly twice as high as the composite rate on most step-up CDs, and many banks are still offering up to 5%.
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