Step-Up Certificates of Deposit – A Good Investment When Rates are Rising

Chances are you know how a traditional certificate of deposit works. You invest a certain amount of money for a certain time period, anywhere from 1 month to 10 years, and your investment receives a fixed rate of interest. If you opened a certificate of deposit anytime during the last five years, you know how low CD rates are these days.

Although current bank CD rates are near historical lows right now, rates will be moving higher over the next 18 months. If you have a certificate of deposit maturing any time in the next 18 months, you shouldn't lock into a low CD rate for a long term. Heeding this advice will limit you to investing in shorter CD terms but with shorter term CD accounts come lower CD rates.

Step-Up Certificates of Deposit A Good Investment When Rates are RisingStep-Up Certificate of Deposits

There is an option for you to invest in a long term CD account and still be able to participate when rates move higher. A few banks offer what is called Step-Up certificate of deposits. With these types of accounts, you are able to have the CD interest rate on the account increased anytime after opening the account.

For example, you open up a 48 month CD account right now and the CD rate is at 1.50 percent. Let's say in 18 months the same bank increases 48 month CD rates to 3.00 percent. At that point, you can ask the bank to increase the CD rate to 3.00 percent. From that point on, your 48 month account earns a rate of 3.00 percent instead of 1.50 percent.

Keep in mind that you'll have to ask the bank to increase your rate. Don't count on the bank to automatically increase it when rates move higher. This means you'll have to keep track of CD rates at your bank. You may also find yourself in a situation when rates moved higher, you ask the bank to increase the rate and then a few months later rates move higher yet again.

Get a Higher CD Rate After the FOMC Meets

Most accounts allow you to increase the interest rate only one time, so make sure you ask at the right time to have your account rate increased. A good course of action to take if you want the rate increased is to check when the Federal Open Market Committee meets. When the FOMC meets, they usually lower or increase the federal funds rate.

In this interest rate cycle, rates will move higher and will probably continue to move higher for several years. So timing when the FOMC increases the fed funds rate may ensure you get a higher rate on your account. FOMC publishes their calendar in advance and you can view the 2013 and 2014 calendar here: FOMC Meeting Calendar.

Some Banks Allow Two CD Rate Increases

On longer term accounts, some banks allow you to increase the interest rate more than once. Ally Bank offers a 48 month account that allows you to ask for a rate increase twice during the 4 year term. Ally Bank's Raise Your Rate CD currently has a rate of 1.29 percent with an APY of 1.30 percent.

Step-Up Account CD Rates Vs. Traditional Account CD Rates

You can easily compare Step-Up account CD rates with traditional account CD rates. Most of the time you will quickly see that Step-Up accounts usually don't have the best CD rates available. If you open a Step-Up account now, you will be able increase the rate on Step-Up accounts over time as rates move higher, but you don't have that option with traditional accounts. This means that in the long run, you may end up with the highest CD rate with the Step-Up account.

Obviously when and if rates increase will determine which account is best to invest in. You won't really know beforehand but one thing is for sure - rates are low now and will be moving higher for years to come.
Author: Brian McKay
August 29th, 2013