Stepped-Rate Account: Definition, Blended APY, and Disclosures

A stepped-rate account is a deposit account that pays two or more interest rates in sequence, with every rate and the exact period it applies locked in and disclosed when you open the account. Nothing is tied to an index, and nothing depends on you asking for a change. In the consumer marketplace, this structure shows up most often as a step-up certificate of deposit.

What Counts as a Stepped-Rate Account

The federal definition sits in the Consumer Financial Protection Bureau’s Regulation DD, which implements the Truth in Savings Act. Under 12 CFR § 1030.2(s), a stepped-rate account is “an account that has two or more interest rates that take effect in succeeding periods and are known when the account is opened.”¹ The essential feature is certainty at day one: each rate and the days or months it covers are baked into the contract.

Credit unions fall under a parallel National Credit Union Administration rule. 12 CFR § 707.2(u) uses the same definition, substituting “dividend” for “interest.”²

How It Differs From Tiered and Variable Rates

Several deposit rate structures sound similar and get mixed up. The distinctions matter because each carries different disclosure rules.

A stepped-rate account applies multiple rates in succeeding time periods, all fixed at opening. A three-year CD paying 5% in year one, 6% in year two, and 7% in year three is the textbook case.¹
A tiered-rate account applies multiple rates to different balance levels at the same time. A savings account paying 0.50% on the first $10,000 and 1.00% on anything above that is tiered, not stepped. The definition is at 12 CFR § 1030.2(t).¹
A variable-rate account has a rate that may change after opening, often tied to an outside index. Because the future rate isn’t known when you open the account, a variable-rate account is not a stepped-rate account. 12 CFR § 1030.2(v) sets the definition.¹

One hybrid to watch for: a variable-rate account offered with a promotional introductory rate. When the intro rate is higher or lower than what would otherwise apply, Regulation DD tells the bank to calculate and disclose the APY as if the account were stepped, treating the intro rate as the first step and the ordinary rate as the second.³ This is what forces the bank to publish a blended yield that reflects the rate you get after the promotion ends.

How the Blended APY Is Calculated

A stepped-rate account pays different rates at different times, so quoting any single rate would mislead. Regulation DD requires a single composite annual percentage yield that blends every rate across the full term.³ The general formula from Appendix A to Part 1030 is:

APY = 100 × [(1 + Interest / Principal)^(365 / Days in term) − 1]

The bank assumes each rate stays in effect for the exact number of days the contract specifies, adds up all the interest the deposit will earn across the term, and plugs that dollar figure into the formula.⁴

Appendix A walks through concrete examples:

A $1,000 six-month CD pays 5% for the first 91 days and 5.5% for the next 92 days, compounded daily. Total interest is $26.68, and the composite APY is 5.39%.⁴
A $1,000 two-year CD pays 6% in year one and 6.5% in year two, compounded daily. Total interest is $133.13, and the composite APY is 6.45%.⁴
For certain time accounts longer than a year that don’t compound and require interest to be withdrawn at least annually, the regulation allows a simpler composite-interest-rate method: multiply each rate by its days, add the products, and divide by total days. In the regulation’s example (5% for 365 days, 6% for 365 days, 7% for 365 days), the composite rate and the APY are both 6.00%.⁴

The APY has to be rounded to the nearest hundredth of a percentage point and shown to two decimals. A disclosed APY is treated as accurate if it comes within five hundredths of a percentage point of the Appendix A result.¹

What the Bank Must Tell You

Truth in Savings gives you a uniform way to compare deposit accounts, and the rules for stepped-rate products operate on two fronts: what you see when you open the account, and what an advertisement is allowed to say.

At Account Opening

When you open a stepped-rate account, the institution must give you a single composite APY together with each interest rate and the specific period each rate will be in effect.⁵ For a two-year CD, that means the first-year rate, the second-year rate, and the blended APY covering both.

Regulation DD supplies a model clause the bank can use: “The initial interest rate for your account is ___%. You will be paid this rate [for (time period)/until (date)]. After that time, the interest rate for your account will be ___%, and you will be paid this rate [for (time period)/until (date)]. The annual percentage yield for your account is ___%.” Banks can adjust the wording, but they cannot drop required information or rearrange it in a way that affects substance or clarity.⁶

In Advertisements

Under 12 CFR § 1030.8(b)(2), any advertisement stating an interest rate for a stepped-rate account has to list all the rates and the time period each one applies.⁷ A bank cannot flash only the highest rate on the schedule and stay silent about the lower ones. If the ad quotes any yield figure at all, it must use “annual percentage yield” or “APY,” and any interest rate shown alongside cannot appear more prominently than the APY.

Whenever an APY appears in an ad, other information has to appear with it: the minimum balance needed to earn the yield, the minimum opening deposit if it’s higher than the balance minimum, a note that fees could reduce earnings, and either the time period the yield is offered or a date it’s accurate as of.¹ For time accounts, the ad also has to state the term and warn that early withdrawal penalties may apply.

Step-Up CDs in Practice

The step-up certificate of deposit is the stepped-rate account most consumers actually encounter. It’s a CD with a built-in schedule of rate increases that happen automatically at set intervals, without any action on your part.⁸

These CDs generally open at a rate below what a standard fixed-rate CD of the same length would pay, then step up on schedule. One example described by U.S. News is a 28-month CD that starts at 0.20% APY, moves to 0.30% after seven months, then 0.40%, and finishes at 0.50% for the last seven months.⁹ Citi offers a 30-month step-up CD with rate increases every 10 months.¹⁰

Because the opening rate is deliberately low, the blended yield over the full term often falls short of what a standard CD or a high-yield savings account pays. Minimum deposits typically run between $1,000 and $2,500, and fewer banks offer them than plain CDs.⁸

Some brokered step-up CDs are callable, meaning the bank can redeem the CD early. The step schedule often lines up with the call dates, so if the bank chooses not to call, the rate rises, though the new rate may still sit below or above whatever the market is offering at the time.¹¹

Step-Up vs. Bump-Up

Step-up CDs get confused with bump-up CDs. A bump-up CD gives you the option, usually once per term, to request a rate increase if the bank has raised the rate on new CDs of the same term. The increase isn’t automatic and won’t happen unless you act.⁹ A step-up CD raises the rate on its own, on the schedule set at opening, no matter what market rates do. Some banks use the two names interchangeably, so check the account agreement for the mechanism rather than trusting the label.¹⁰

1
eCFR. 12 CFR Part 1030 — Truth in Savings (Regulation DD)
2
eCFR. 12 CFR Part 707 — Truth in Savings
3
CFPB. 12 CFR § 1030.4 — Account Disclosures
4
CFPB. Appendix A to Part 1030 — Annual Percentage Yield Calculation
5
CFPB. Official Interpretations — § 1030.4
6
CFPB. Appendix B to Part 1030 — Model Clauses and Sample Forms
7
CFPB. Official Interpretations — § 1030.8
8
Bankrate. What Is a Step-Up CD
9
U.S. News. How Do Bump-Up and Step-Up CDs Work
10
Citi. What Is a Step-Up CD
11
Raymond James. Brokered Certificates of Deposits