The band released its second album, Separation Sunday, on May 3, 2005. The album was a loose concept album following the exploits of a character named "Holly" (short for "Hallelujah") and her quest to find a balance between Catholicism and rock and roll through drugs and a metaphorical resurrection. The album was critically lauded, and its religious overtones were picked up by many critics, such as Joe Gross of the Village Voice, who dubbed it "the most egregiously American Catholic album since X's Under the Big Black Sun, Springsteen's Tunnel of Love, or that Jewish new waver Billy Joel's The Stranger."
After Separation Sunday, for its third album the band moved from the Frenchkiss Records imprint to Vagrant Records. Released October 3, 2006, Boys and Girls in America was ranked #8 on the Rolling Stone Best Albums of 2006 list, and first by The A.V. Club. Pitchfork Media's Scott Plagenhoff wrote of the album, "[Craig Finn] not only has a commanding, rousing voice but he also says something worth hearing, displaying gifts for both scope and depth that are all too rare in contemporary rock — indie or mainstream. In 2007, the band recorded a modified version of "Take Me Out to the Ballgame" to be played during the seventh-inning stretch at Minnesota Twins home games. They also contributed a cover of the Bob Dylan and The Hawks/The Band song Can You Please Crawl Out Your Window? to the motion picture I'm Not There.
The band's fourth album, Stay Positive (album), was released in the UK on July 14, 2008 and in the U.S. on July 15. The album was recorded in Hoboken, New Jersey and Wild Arctic studio in Queens, New York with producer John Agnello during January and February that year. Guests on the sessions included Ben Nichols from Lucero, J. Mascis of Dinosaur Jr., Emilyn Brodsky, and Doug Gillard, who played guitar in Guided By Voices. Finn has said that he believes the album "captures a band hitting their creative peak, as well as enjoying each other's creativity and company. The album is more expansive than previous releases, including talk-box solos, harpsichord, and tuneful vocals (the notoriously gruff-voiced Finn started taking voice lessons). "There are some bands that do five records that all sound similar", says guitarist Tad Kubler. "We've tried to avoid that. Many familiar elements – sing-along choruses, extended piano and guitar solos and lyrics that deal with faith, crime, rumor, loss and love – remain.
The Hold Steady has toured and played with a variety of other artists, amongst them Les Savy Fav, The Constantines, P.O.S., Swearing at Motorists, the Rolling Stones (as mentioned in the Stay Positive bonus track "Ask Her For Adderall"), The Thermals, Art Brut, Kings of Leon, and The Loved Ones.
Growing up in Minneapolis, Hüsker Dü was a huge band. I always thought Grant Hart was the better songwriter, and his lyrics were very specific. Bob Mould kind of favored vague lyrics. But as far as detail-oriented songwriters, more contemporary... certainly Bruce Springsteen, Jim Carroll, John Darnielle from The Mountain Goats. A lot of hip-hop really inspires me. My absolute favorite stuff is Brother Ali from Rhymesayers. Atmosphere, obviously. Things like Aesop Rock, Sage Francis, MURS, all those guys. Even Jay-Z. Hip-hop is so much about lyrics, and as a lyricist it's hard not to be inspired by it.