What is a step-up or rising rate CD?

Certificates of deposit are generally pretty straightforward: You choose a term and the bank pays you a fixed interest rate as long as you keep your funds there until maturity.

But some banks will throw a specialty CD or two onto their menu. One is the step-up CD, and its name can sometimes confuse. So let’s dig into what step-up certificates are, and what they’re not.

Step-up and rising rate CDs are usually the same thing. Both pay pre-established interest rates that increase at intervals throughout the term. For instance, a five-year step-up CD may pay 0.5% in Year 1, then 1.0% in Year 2, and so forth until it pays 2.5% in Year 5.

That means your true earnings are a blended rate that averages the various tiers. In the example above, the CD would pay an actual rate of 1.5% over five years.

Of course, if you cash out early on a step-up CD, not only will you be hit with an early withdrawal fee, but you’ll miss out on the higher rates you would have earned in later years.

Shopper beware that there are also bump-up and raise-your-rate CDs. With these, you can choose to raise your CD’s APY to the bank’s current (presumably higher) rate, usually once or twice during the term.

Also note that some banks have begun interchanging these terms. So while the definitions above are traditionally true, you may see a CD marketed as a step-up when actually it’s a bump-up.

Step-up CDs are typically advertised with their highest rate highlighted, so be sure to read the fine print on what the blended rate will be. It’s likely you can earn more by shopping diligently among the fixed-rate certificates. In any case, be sure you understand exactly what it is you’re looking at.