Rising-rate certificates of deposit are a growing force in bank marketing campaigns, if not yet in consumer popularity. Bank of America (Stock Quote: BAC), Ally Bank and First Midwest (Stock Quote: FMBI) all offer some form of rising-rate CDs.
Rising-rate, or step-up, CDs give bank deposit investors the right to opt out of a current (presumably lower) CD rate and into a higher rate CD as interest rates rise.
With many economists predicting that bank interest rates are headed north, a built-in insurance policy that allows you to ramp-up to a higher rate sounds pretty good to CD investors.
But is the deal as good as it sounds? In some ways it is, and in some ways it isn't. Here’s how rising-rate CDs work.
Let’s say you buy a two-year CD at a rate of 1.23% (that’s the current average rate on two-year CDs according to the BankingMyWay Weekly CD Rate Tracker).
If nine months from now, the interest rate on that CD drifts up to 2.23%, you can pull the lever on the “step-up” provision in your rising-rate CD by notifying your bank you want the elevated rate. Now, some banks handle the step-up differently. First Midwest’s rising-rate CD, for example, automatically triggers a rate hike every eight months. But Ally Bank takes a different approach — it only allows you one interest rate boost within the term of its two-year rising-rate CD product.That just goes to show you, if you want to take full advantage of step-up CDs, you have to read the fine print on each bank’s deal, and choose the one that makes sense for you. If you’re easily distracted from banking chores, as many busy Americans are these days, then an automatic trigger like the one First Midwest offers could be for you.
But if you’re a hands-on bank investor, step-up CDs at banks like Bank of America and Ally that allow you to choose when you kick in your higher rate might be the better call.