Interpretation of Rising Rate Certificates of Deposit
A rising rate certificate of deposit is a type of certificate of deposit (CD) that features an interest rate that increases over time. Typically, a traditional certificate of deposit has the same interest rate for the duration of its term.
Definition and Examples of Rising Rate Certificates of Deposit
A rising rate certificate of deposit is a CD in which the interest rate gradually increases or “rises” over time. It is a type of variable-rate certificate of deposit.
One of the biggest drawbacks of a traditional certificate of deposit is that you are locked into a fixed interest rate for the term of the certificate. However, with a rising rate certificate of deposit, your rate automatically increases over time, allowing you to benefit from rising interest rates.
Alternative name: Increasing interest certificate
You will hold the rising rate certificate of deposit for a specified period, such as six months, one year, or five years. The rising rate certificate of deposit gradually increases the interest rate over time, usually according to a fixed schedule. For example, U.S. Bank offers a rising rate certificate of deposit for 28 months. The interest rate increases every seven months. The rates are locked in, so you know what each increase will be and when it will occur.
How Does a Rising Rate Certificate of Deposit Work?
Like a traditional certificate of deposit, you can open a rising rate certificate of deposit with any bank or credit union that offers it. Once funded, this amount is locked until it reaches “maturity.” This is determined based on the term of the certificate, such as six months or 10 years. Later maturity certificates typically have higher interest rates.
But unlike traditional certificates, which have the same interest rate throughout your term, rising rate certificates of deposit feature interest rates that gradually increase over time.
The increases are predetermined. This means you know in advance when your rates will rise and by how much. For example, TD Bank has a rising rate certificate of deposit for five years with rates increasing by 0.05% each year. In the first year, the interest rate is 0.05%. In the fifth year, the interest rate is 0.25%.
Note: Some banks may report “Blended APR” with their rising rate CDs. This annual percentage rate is the average of all the interest steps in your rising rate certificate of deposit.
Is a Rising Rate Certificate of Deposit Worth It?
The best way to determine whether a rising rate certificate of deposit is worth it is to compare its blended annual percentage yield (APY) to that of a traditional CD. This tells you how much interest you will actually earn over time. Suppose you’re trying to decide between a traditional CD earning 0.4% APY and a rising rate CD with the following rates:
- 0.05% for the first seven months
- 0.25% for the next seven months
- 0.45% for the next seven months
- 0.65% for the next seven months
On the surface, you might think the rising rate certificate is the better option. After all, its APY reaches 0.65%. However, when you calculate those rates together, the blended annual percentage yield is only 0.35%. That’s less than what you would earn with a traditional CD. In this case, the rising rate certificate of deposit wouldn’t be worth it.
An additional factor to consider is that most certificates of deposit will charge you a fee for early withdrawal if you take out some or all of the amount before the certificate matures.
Rising Rate Certificate of Deposit vs. High-Rate Certificate of Deposit
Rising rate certificates of deposit and high-rate certificates of deposit come with interest increases, but that’s where the similarities end.
| Rising Rate Certificate of Deposit | High-Rate Certificate of Deposit | |||
|---|---|---|---|---|
| The interest rate increases regularly over the certificate’s term | Can
With a bump-up certificate of deposit, the bank automatically increases your interest rate on a set schedule. Both the interest rate increases and the timing of those increases are specified for the validity period of the certificate. With a high-rate certificate of deposit, you must inform your bank and request a rate increase. Usually, you can only request one increase for the entire term. So, if your interest rate goes up to 0.7% and you request an increase, you will not be able to request another increase if it rises to 1% after six months. Note: A high-rate certificate of deposit may also be referred to by names such as “jump-up” CD or “trade-up” CD or “raise-your-rate” CD. Always read the fine print when comparing bump-up CDs because they are not all the same. For example, Southeast Bank offers what it calls a “bump-up certificate of deposit.” But when you read the fine print, it is actually more like a high-rate certificate of deposit. You have to initiate the rate increase, and you can only do it once. Advantages and Disadvantages of Bump-Up Certificates of DepositAdvantages:
Disadvantages:
Explanation of Advantages:
Explanation of Disadvantages:
Note: The bump-up certificate from TD Bank comes with one penalty-free withdrawal each year on your account anniversary. Alternatives to Bump-Up Certificates of DepositIf you are unsure about opening a bump-up certificate of deposit, there are different options that you can consider. CD Ladders: A CD ladder is a strategy where you set up multiple certificates of deposit, each with different rates and maturity dates. For example, you might open a six-month CD, a 12-month CD, and an 18-month CD all at once. As they start maturing, you can decide if you want to withdraw the money, renew the certificate with your current bank, or search for better rates. This means that every six months, you have access to some of your money. Notes U.S. Treasury Inflation-Protected Securities (TIPS): Treasury Inflation-Protected Securities (TIPS) are a type of bond that rises alongside the consumer price index. They are a great alternative if you want to protect your money from rising inflation without having to lock it in a certificate of deposit. High-Yield Savings Account: A high-yield savings account can be a good alternative to a step-up certificate of deposit if you want access to your money at any time. This can be a good option if you are saving for an emergency fund, a vacation, or a down payment on a house. You will earn a higher interest rate than you would with a checking account. You will also be able to make six withdrawals per month. Was this information helpful?Thank you for your feedback! Let us know why! Last Sources: The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. U.S. Department of the Treasury. “Treasury Inflation-Protected Securities (TIPS).” Accessed February 7, 2022. TD Bank. “TD Step Rate Certificates.” Accessed February 7, 2022. Financial Consumer Protection Bureau. “The interest offered on certificates of deposit (CDs) is low. Is there anything I can do about it?” Accessed February 7, 2022. U.S. Bank. “Step-Up Certificate of Deposit.” Accessed February 7, 2022. Financial Consumer Protection Bureau. “The interest ALL, AS, Aspect, CASE, Compound, FDIC, INDEX, investment, ITS, Later, Max, stock, The Stock, Them, TIME
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