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How Does This Step-Up CD Actually Work?

With markets expecting interest rates to rise, step-up CD promotions are becoming more popular.

These CDs — also called “bump-up” or “raise your rate” CDs — permit the owner to increase the rate should the institution’s posted rates increase during the term.

A recent experience with a step-up right I thought I had but didn’t has prompted me to make a list of some questions savers should ask before opening a bump-up certificate of deposit, to make sure they’re getting what they’re paying for.

Unfortunately, website disclosures aren’t always crystal clear.

Question 1. When may I exercise my step-up right?

With some step-ups, such as Mountain America Credit Union‘s current promotional 2.30% APY 5-year CD, the bump-up right kicks in immediately, and lasts for the full term.

With others, such as a 1.51% APY 30-month promotional CD offered this month by Velocity Credit Union, the rate may only be increased on a specific date.

(That date is identified by Velocity as “your anniversary” — better ask what that means!)

The former type of step-up right is more valuable than the latter.

Question 2. How often can I increase my rate?

Both the Mountain America and Velocity CDs only allow one rate increase, as do CIT Bank’s 1- and 2-year “RampUp” CDs.

Some longer-term step-up CDs, however, such as Ally Bank’s 4-year raise your rate CD, allow two — and sometimes three-bites at the apple.

The more available bumps, the better.

Question 3. What posted rate will be used as the benchmark for raising my rate?

Because step-up CDs generally have a lower initial rate than the institution’s standard CD of the same maturity, bump-ups are typically based on future rates posted on comparable step-up CDs, not standard CDs.

However, where the step-up right is simply added to the standard CD rate during the promotional period, as with Mountain America’s offering, the bump may be tied to the future posted rate on the standard product.

That is clearly the better option for savers.

Question 4. What happens if the institution stops offering the benchmark CD?

I got blindsided on this by Firstmark Credit Union, where I have a step-up 60-month jumbo CD it no longer offers.

My request to raise the initial 2% APY rate to the current 2.10% APY rate posted for standard 5-year jumbo CDs was declined.

I was told that, even though Firstmark discontinued offering step-up CDs, it still maintains a hypothetical posted rate for this non-existent product — which is 1.45%.

I didn’t bother arguing about it.

But I’ll try to keep this from happening anywhere else, ever again.

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