Point of Interest: Step-Up CD Rates
Step-up CD rates let investors to raise the APY on their certificates of deposit at least once during the term, allowing them to take advantage of rising rates without opening another CD.
If you expect interest rates to rise in the near future, you might be reluctant to lock in your investment CDs at a fixed rate and miss the chance to increase your income. Fortunately, banks have a product that solves this concern: step-up CDs.
A step-up CD gives you the opportunity to increase your return when interest rates go up. These adjustable CDs offer several different ways to increase the rate on your investment at various times before maturity. You can examine each bank’s step-up CD to find the terms and conditions that best suit your specific requirements.
The 7 Best Step-up CDs of 2020
- Ally Bank: Best no minimum CD
- Wells Fargo Bank: Best for flexible, penalty-free withdrawals
- U.S. Bank: Best for early first raise
- TD Bank: Best for frequent raises
- CitiBank: Best guaranteed rate increases
- Westfield Bank: Best for annual raises
- BankFlorida: Best long-term CDs
|Ally Bank||No Minimum||2.05%||2 and 4 years||Once per two years|
|Wells Fargo Bank||$2,500||1.16%||2 years||At 7, 13 and 19 months|
|U.S. Bank||$1,000||0.40%||28 months||Every 7 months|
|TD Bank||$250||0.33%||3 and 5 years||Once per year|
|CitiBank||$500||0.76%||30 months||Every 10 months|
|Westfield Bank||$2,500||1.88%||5 years||Once per year|
|BankFlorida||$10,000||N/A||3, 4 and 5 years||Once|
What is a step-up CD?
A step-up CD is like a traditional certificate of deposit that lets investors lock in a fixed interest rate for a specific period of time. However, it has the added feature of giving the investor the opportunity to earn a higher rate of return if interest rates go up.
The number of intervals and the amount of each raise are set by the issuer.
Step-up CD vs. a traditional CD
While a traditional CD offers a fixed return to maturity, a step-up CD offers you the opportunity to increase your rate and take advantage of rising interest rates. The downside of a step-up CD is that its initial rate is usually lower than the starting rate of a comparable CD.
Both step-up CDs and traditional CDs typically have some type of restrictions and penalties for early withdrawals.
Step-up CD vs. savings account
While a step-up CD has withdrawal restrictions, funds in a savings account can be withdrawn whenever needed, although the total number of withdrawals per billing cycle is limited to six. Interest rates on a savings account will be lower than the rates on step-up CDs.
A savings account should be used for accumulating emergency funds and saving for items such as a down payment or education costs, whereas funds invested in step-up CDs will be locked away and not available for several years. If you need more immediate access to your funds, you should opt for a savings account. however, if you are happy with funds being locked in order to yield a higher dividend, consider the CD.
Step-up CD vs. money market account
A money market account will pay slightly more than a savings account but not as much as a step-up CD. Funds can be withdrawn at any time from a money market account without penalties but not more than six times per month, per federal regulations.
Keep in mind that money market accounts may also require a minimum balance and may charge a penalty if you fall below that balance. It’s important to check with your financial institution and read the fine print to determine this.
The 7 Best Step-Up CDs of 2020
Ally Bank: Best for online banking
Ally Bank has developed a strong online presence and is known for its low fees and attractive savings rates.
Ally offers a Raise Your Rate CD with 2- and 4-year maturities with an APY of 2.05%. You have the option to request a rate increase one time for the 2-year CD and twice for the 4-year CD. Early withdrawals will incur penalties of 60 days interest for the 2-year CD and 120 days interest for the 4-year CD. Partial withdrawals aren’t allowed.
Wells Fargo: Best for flexible penalty-free withdrawals
A step-up CD at Wells Fargo is only available for 24 months. The minimum deposit is $2,500 with guaranteed rate increases at 7, 13 and 19 months which produce an APY of 1.16%. You can make a penalty-free withdrawal at the time of each rate increase as long as the balance exceeds the minimum opening balance requirement. An important note is that a CD account can only be opened in person at a Wells Fargo branch, so you will have to travel to a location
U.S. Bank: Best for frequent raises
U.S. Bank offers a step-up CD with a 28-month maturity and a minimum investment of $1,000. Rate increases are fixed at seven-month periods, so you know at the beginning exactly how much you will be receiving. The current blended APY is 0.40%, which means that if you keep the same deposit in the account throughout the life of the CD, you may receive a 0.40% overall dividend earning on your funds.
TD Bank: Best for low minimum and yearly increases
You can open a 3- or 5-year step-up CD at TD Bank with as little as $250 and have the ability to make a partial or full withdrawal without penalty at each anniversary. The 5-year CD has a current APY of 0.33%.
Citibank: Best guaranteed rate increases
Since its opening in 1812, Citibank has grown into an international operation with more than 2,700 branches worldwide. It offers an extensive variety of products to its retail customers. Its step-up CD has a 30-month maturity and an APY of 0.76%. The required minimum balance is $500, and rates are increased every 10 months at rates that are fixed at the time of opening.
Early withdrawals of the principal will incur a 180-day interest penalty. However, you can withdraw without penalty fees any time after interest has been credited to your account.
Westfield Bank: Best long term CD with annual raises
Westfield Bank, headquartered in Ohio, is an example of a local bank that offers a step-up CD. This bank offers a 5-year step-up CD with annual rate increases fixed at the time of opening for an APY of 1.88%. Penalties for early withdrawals are 7 days simple interest for the amount withdrawn.
BankFlorida: Best choices of longer terms
BankFlorida offers step-up CDs with maturities of 3, 4 and 5 years, but it requires a minimum deposit of $10,000. You can even add up to 50% of your initial principal at any time if you feel interest rates are going up and want to take advantage.
On the other hand, the bank also allows you to withdraw up to 50% of your initial deposit at any time without any penalties. Additional withdrawals, however, may incur penalties. The step-up CD holder has the right to request a one-time rate increase at the current rate of a traditional CD for the same maturity. The bank must be contacted for current rates.