What Is a Step-Up CD? How It Works and Who It Fits Best

A step-up certificate of deposit (CD) is an account with built-in interest rate increases that happen automatically throughout the term. Learn how step-up CDs work, how they compare with bump-up CDs and whether they're a good fit for you.

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Key Takeaways

• A step-up CD raises your interest rate automatically on a preset schedule. You get each increase without asking, unlike a bump-up CD where you have to activate them yourself.

• Step-up CDs usually start below traditional CD rates, so check the blended APY. That blended figure, not the highest advertised rate, reflects your true return across the full term.

• Compare a step-up CD's blended annual percentage yield (APY) against a standard CD before you commit. Step-ups often trail traditional CDs or high-yield savings, so the math doesn't always work in your favor.

• Step-up CDs fit savers who value predictability over chasing the top rate. You know every rate and increase date up front, with no market timing required.

• Expect an early withdrawal penalty if you take money out before maturity. Confirm the minimum deposit, penalty amount and insurance before you open one.

Summary generated by AI, verified by MoneyLion editors

What Is a Step-Up CD?

A step-up CD automatically increases your interest rate at predetermined points during the term. The increases happen on a set schedule, so you don't need to request a higher rate.

• Step-up CD rates start at lower rates than traditional CD accounts.

• Rate increases are automatic and don’t require a request.

• Step-up CDs aren’t widely available everywhere.

• These accounts offer guaranteed rate increases so there is more certainty than a variable CD rate.

How Do the Rate Increases Work?

Step-up CDs don’t require you to initiate the rate increase. They are built-in automatically and so you basically “set it and forget it.” Although every bank sets its own schedule, step-up CDs generally work like this:

1. Open the CD: When you open the account, you'll receive a schedule showing when the interest rate will increase throughout the term.

2. Earn the initial rate: For example, you might earn 0.20% APY during the first seven months.

3. Receive automatic rate increases: At predetermined intervals, your rate will increase. For example, it could rise to 0.30% APY during the next period and 0.50% APY later in the term.

4. No action required: The rate increases are built into the account terms, so you know when they'll happen without needing to request a higher rate.

Step-Up CD vs. Bump-Up CD

Step-up CDs and bump-up CDs both offer the opportunity to earn a higher interest rate over time, but they work differently.

• Step-up CD: The rate increases are preset and automatic.

• Bump-up CD: You request the rate increase, and you're typically limited to one or two during the term.

Are Step-Up CDs Worth It?

Step-up CDs aren't the right choice for everyone. They may be worth considering if one of the following applies:

• You want to set it and forget it: Rate increases are automatic, so you don’t need to worry about requesting an increase.

• You value predictability: You’ll know the rate increases ahead of time so there’s no guesswork involved.

• You don’t want to worry about the market: Your rate increases are locked in despite what the market does.

Good To Know

Don't confuse the starting interest rate with the advertised APY. The APY reflects the step-up CD's overall average annual return after all scheduled rate increases are factored in.

Step-Up CD vs. Traditional CD vs. High-Yield Savings: Key Differences

Step-up CDs, traditional CDs and high-yield savings accounts all earn interest, but they work differently. Here's how they compare.

What To Check Before Opening a Step-Up CD

Before locking up your money, make sure you understand how the account works and what you'll actually earn. Check the following:

• Don’t just look at the highest advertised rate. Check the blended rate.

• Compare the blended rate with the traditional CD rates that are offered.

• Confirm if there is an early withdrawal penalty and how much it is.

• Ask whether your funds are insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).

• Check the minimum deposit that's required.

• Verify whether the CD renews automatically.

Bottom Line

• Step-up CDs offer an automatic rate increase. You don’t have to initiate the increase.

• Do not just pay attention to the advertised high rate. Look at the blended rate.

• Step-up CDs are a predictable savings account option.

• Not all banks offer step-up CDs. Check your local bank to see if they offer these CDs.

Step-Up CD FAQs

What is a step-up CD?

Step-up CDs are a type of CD that have built-in interest rate increases. You don’t have to initiate the rate increase.

How often does a step-up CD rate go up?

There is no universal step-up CD rate increase. If you open a 28-month CD, the rate increase may happen every six or seven months.

What's the difference between a step-up CD and a bump-up CD?

In a step-up CD, there are multiple rate increases and they are automatic. In a bump-up CD, you are typically limited to one request that you must initiate.

Do step-up CDs actually pay more than traditional CDs?

Step-up CDs start at a lower initial rate and pay a return based on a blended rate. It’s a predictable return. With a traditional CD, you’re able to secure the highest rate of return for the entire term.

Can I withdraw early from a step-up CD?

You are permitted to withdraw early, but it will likely trigger an early withdrawal penalty. The penalty will vary by bank or credit union.

Are step-up CDs good when interest rates are rising?

Step-up CDs have a fixed rate increase that is preset. Market fluctuations don’t impact the rates of a step-up CD.

Key Terms

• Step-up CD: A certificate of deposit where the interest rate rises automatically at set points during the term, with no action needed from you.

• Bump-up CD: A CD that lets you request a higher rate if your bank raises rates during your term, usually once and sometimes twice on longer terms.

• APY: The total interest you earn in a year, including compounding, expressed as a percentage.

• Blended APY: The overall annual percentage yield you earn across a step-up CD's full term after all scheduled increases are averaged in. Compare this figure, not the starting rate, against other CDs.

• Early withdrawal penalty: A fee, often several months of interest, charged if you take money out before the CD matures. It can cut into your principal if you haven't earned enough interest yet.

• Maturity date: The date your CD term ends and you can withdraw your deposit plus earned interest without a penalty.

Summary generated by AI, verified by MoneyLion editors

Sources

• Consumer Financial Protection Bureau. 2024. "The interest rate offered for CDs (certificates of deposit) is low. Is there anything I can do about that?"

• Warsaw Federal. "Bump-Up CDs vs. Step-Up CDs."

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