What are you saving for? Your first home? A new car? Your kids’ college? Whatever it is, there are a variety of financial products available to help you plan and save for your future, including traditional savings accounts and money market accounts. One convenient option that might not be as familiar to you is a share certificate. At Capital Credit Union, we aim to provide the tools and knowledge you need to be successful in your financial journey, wherever you’re headed. In this article, we’ll break down the facts about share certificates. What exactly are they? How do share certificates work? How are they different from certificates of deposit (CDs)? We have all those details plus more to help you decide which financial products will work best for you.
What Is a Share Certificate?
A share certificate is a type of savings product in which you agree to leave your money in the account for a fixed term, and in exchange, you get the benefit of a higher rate of return for that amount of time. The return rate is typically higher than what you’d find with standard savings accounts. Certificates can be a great option if you are looking for a stable investment with a greater, guaranteed return—as long as you do not need immediate access to your money. If you need to access your funds before the end of the agreed-upon term, you won’t receive the full dividend amount, and you may have to pay a penalty for early withdrawal.
How Is a Share Certificate Different from a CD?
Although share certificates are very similar to CDs, or certificates of deposit, they have some important differences. Both share certificates and CDs are secure deposit accounts that offer higher returns on investment than traditional savings accounts. On the other hand, the differences include:
- Issuer: Banks issue CDs, while credit unions issue share certificates.
- Insurer: The Federal Deposit Insurance Corporation (FDIC) insures CDs, and the National Credit Union Administration (NCUA) insures share certificates.
- Earnings: CDs pay out interest, while certificates pay dividends.
- Eligibility: CDs typically require you to also open a standard savings account at the bank where the CD will be held. Share certificates generally require credit union membership.
If you are not a member of a credit union and prefer to keep all your accounts in one place for simplicity’s sake, you might choose to open a CD account at your current bank. However, there are several additional benefits to joining a credit union that you should consider as well. Because credit unions are community-focused and not-for-profit financial institutions, they can offer members a number of advantages:
- More competitive rates on savings products and loans
- Low minimum balance requirements and lower fees
- Excellent, more personalized customer service
- Educational tools and resources to increase your financial literacy
In addition, many people find it easier to qualify for accounts and loans at credit unions since they are focused on building relationships and assisting the people within their communities.
Why Choose a Share Certificate Over a CD?
Deciding between a share certificate and a CD might simply be a matter of where you bank and whether you want to join a credit union or if there is a credit union near you. However, since credit unions typically offer more competitive rates in general, as a way to share profits with their members, share certificate dividend rates are often better than CD interest rates. Minimum deposit requirements may also be lower. Also, many members appreciate that credit unions invest in their local communities and are focused on the well-being and growth of their members. One significant benefit of CCU’s share certificates is flexibility. Our Member’s Choice Certificate makes saving even easier by lowering the minimum opening deposit to $1 and allowing one penalty-free withdrawal per term. You still earn higher dividends for the term you choose (up to 12 months), but you can build your savings gradually with monthly deposits. This specialized share certificate is great for young savers or if you’re saving toward a specific purchase.
How Do Share Certificates Work?
So, how do share certificates work? It starts with an application. You can typically apply online or schedule an appointment with a service representative at your local credit union. Share certificates usually have a minimum deposit requirement, ranging from $500 to $1,000—although there are exceptions, as we mentioned with our Member’s Choice Certificate. You can bring in cash or transfer the funds from another account at the credit union or even from another financial institution. Choose the length of time you want to leave your money in the account, known as a fixed term. Terms can be as short as three months but are not usually longer than five years. As we mentioned above, if you need to withdraw money before the end of the fixed term (or maturity date), you will usually incur an early withdrawal penalty, so it’s important to consider the length of your term carefully based on your specific financial situation. During the fixed term of your certificate, you receive a guaranteed dividend rate on your money. This is locked in when you open the certificate account. Dividend rates will vary based on the term length (longer terms usually yield higher rates) and the credit union you choose.
What Happens at the End of the Term?
When you arrive at the end of the term, the share certificate will have reached maturity and have earned the full dividend amount. It is now available to access. That doesn’t mean you have to access your funds, however. You have a few options for next steps. You can, of course, withdraw the funds if you wish. You can also transfer the funds to another account, such as a savings or checking account. A third option is to renew the certificate for another term, which could also give you a new interest rate. Most credit unions will give you a grace period of anywhere from a week to 10 days to decide on your next steps.
Let Your Money Work for You in a Share Certificate
Now that we’ve answered the question, “How do share certificates work?” it’s easy to see why share certificates are a popular way to let your money work for you. If you would like to learn more about the benefits of membership and share certificates at Capital Credit Union, contact us online or stop by one of our branches to get started. 