What is a Step-Rate CD?
We’ve been talking a lot about CDs lately on Savingtoolbox.com, and I’m going to continue on with that theme for awhile, as in low-interest rates time like we’re in, banks usually offer up a bunch of diverse CDs to customers to provide a variety of options to suit individual needs, and also to entice them to park their money using some dangling carrots of higher interest rates and flexibility for those looking for better but safe interest returns.
Some of these CD products are called different names by different banks, and sometimes in different parts of the country, so it can become very confusing to those shopping for banking products. For example, we recently looked at what is called bump-up CDs, which can be used to take advantage of higher interest rates, but the owner has the responsibility to check in with their bank sometime in the duration of owning the CD to tell them they want to bump it up to a higher interest rate.
Now with something called a Step-Rate CD or Step Up CD, it’s a little different in that there are guaranteed interst rate increases which the buyer doesn’t have to be concerned about watching, but automatically kick in a specific intervals of the term of ownership.
For example, a 4-year CD may start off at a 4 percent interest rate for a year, and then jump to 4.5 percent after 24 months, and on up as it matures.
What you want to do with something like that is add up the interest rate offered during the term of the CD and divide them by four, or however many years you have it to get an average interest rate for the overall period you own it. That guides you as to whether it’s a good deal or not.
Many Step-rate CDs will be for less time, but still offer interest rate increases at intervals of seven months and so on, so you can still divide by the number of increases over the length of the CD and get the average interest rate for the period of time you own it.
So the difference between a bump-up CD and a Step-rate or step up CD is you’re guaranteed an interest rate at specific intervals and specific rates while you own it. Bump-up CDs on the other hand, only guarantee that you can bump up the rate sometime during the time you own it. Sometimes it’s more than one time, but with many bump-up CDs you only get one crack at it. You’re still guaranteed a minimum interest rate, but it’s less certain as to how much it’ll increase, as it depends on the market.
Step-rate CDs are for those who want certainty and guaranteed returns they don’t have to think about. Bump-up CDs are for more hands-on people who want the chance to make more on their interest rates by watching the market carefully and timing the interest rate bump for the best possible increase.
If these types of CDs are called something different when you’re checking them out, just remember the differences shown in the above paragraph and you’ll understand what they do no matter what name is applied to them.
Tags: cds, certificate of deposit, certificate of deposits, saving strategies, savings plans, Step Rate CD
