A step-up CD is a deposit account that locks in your principal at a set interest rate for a fixed number of months. However, the interest rate of a step-up CD increases by a pre-determined amount at regularly scheduled intervals throughout its term.
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- Updated: February 21, 2023
- 4 min read time
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What Are Step-Up CDs?
A step-up certificate of deposit (CD) is a savings vehicle for your personal finances offered by banks and credit unions. Similar to a traditional CD, a step-up CD is a deposit account that locks your savings in for a set term in exchange for a fixed interest rate. But in a step-up CD, that interest rate increases at scheduled intervals until it matures.
You will pay a penalty if you withdraw any part of the amount before the deposit term ends. The CDs are also covered by FDIC insurance when purchased through a reputable financial institution.
How Do Step-Up CDs Work?
When you purchase a step-up CD, you agree to leave your money locked into a deposit account for a fixed period at an interest rate set by the financial institution. During the account’s term, that interest rate will rise at regular intervals, meaning you have the chance to grow your savings more than you would in a traditional CD.
For example, if the terms of your step-up CD are two years with a 0.5% interest rate that increases 0.1% every six months, the annual percentage yield (APY) would look like the following.
- First six months: 0.5%
- Next six months: 0.6%
- Third six months: 0.7%
- Final six months: 0.8%
Pros and Cons of Step-Up CDs
Step-up CDs are a secure way to earn interest on your savings. But like any other savings vehicle, they have advantages and disadvantages.
- A guaranteed rate of return
- Scheduled interest rates to increase savings growth
- Security and peace of mind with reduced risk
- Your money is locked away for a whole term
- You pay heavy penalties for any withdrawals before the CD matures
- Interest rates may be lower than with other investment options
If you’re unsure whether a step-up CD is right for you, consider weighing your options with a financial advisor to determine which type of CD is best suited for your needs.
Alternatives to Step-Up CDs
A step-up CD might not be the right choice in every situation, or it may not even be available at your bank or credit union. If that’s the case, then you might consider one the following.
- Other Specialty CDs
- Some financial institutions offer CDs with variable rates that mature in shorter terms or allow to you to add to your balance.
- Build a CD Ladder
- Dividing your savings into multiple CDs with different maturity dates gives you the chance to access higher interest rates without tying up all your money.
- Bump-Up CDs
- With a bump-up CD, you can request a rate increase once or more during the term of your CD. With a step-up CD, the bank decides how much the interest rate increases and when, whereas with a bump-up CD, you time the increase to your best advantage.
- Other Alternatives
- If you’re looking for secure savings, but don’t want to worry about withdrawal penalties, you might also consider a high interest savings account or a money market account.
Frequently Asked Questions About Step-Up CDs
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3 Cited Research Articles
Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.
- Forbes Money. (2022, November 12). When Are CDs A Good Investment? Retrieved from https://forbes.com/sites/quai/2022/11/12/when-are-cds-a-good-investment/?sh=ce573a91913d
- Federal Deposit Insurance Corporation. (July 1, 2021). Are My Deposit Accounts Insured by the FDIC? Retrieved from https://www.fdic.gov/resources/deposit-insurance/financial-products-insured/
- U.S. Securities and Exchange Commission. (n.d.). What Are Certificates of Deposit? Retrieved from Certificates of Deposit (CDs) | Investor.gov
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