When it comes to building your savings, CDs offer a low-risk way to earn interest on your hard-earned money. Those types of savings accounts can come in many forms, including step-up CDs.
Simply put, a step-up CD is a type of CD that offers periodic interest rate increases. That means you’d end up with a higher interest rate than you started with, leading to more earned interest. However, it’s vital to understand how these accounts work before opening one.
Let’s explore step-up CDs, how they compare to traditional CDs and what to consider before opening one.
What is a step-up certificate of deposit (CD)?
A step-up CD is a type of CD that’s designed to offer periodic interest-rate increases during the term. The term is the time it takes for the CD to mature, which is when you may access your money, plus interest. For example, Citi step-up CD has a 30-month term and offers interest-rate increases every 10 months.
It should also be noted that some financial institutions may also use the term step-up CD to refer to bump-up CDs, which work differently. Bump-up CDs may allow you to increase your APY, but typically only once per term and you must request it.
How step-up CDs work
Step-up CD interest rates increase automatically and are not tied to market movements. Rather, those increases are pre-determined when you open the account. However, as with traditional CDs, the account holder typically can’t withdraw funds before the CD term ends without paying an early withdrawal penalty. The exact penalty can vary by financial institution.
Step-up CDs vs. traditional CDs
There are some similarities between traditional and step-up CDs. For example, both typically require you to keep your money in the CD for the full term and may charge a penalty if you withdraw funds early.
That said, it’s important to understand the differences between traditional CDs and step-up CDs. For example, traditional CD interest rates are typically fixed for the full term, while step-up CD rates increase by a pre-determined amount. But this doesn’t necessarily mean step-up CDs have higher rates. Step-up CDs may have a lower rate early in the term compared to traditional CDs. As a result, some step-up CDs may yield less interest overall than top fixed-rate CDs, depending on the interest-rate environment when you open the CD as well as the term you choose.
