How Does a Share Term Certificate Work?

A share term certificate is a type of savings account offered by credit unions. It functions similarly to a Certificate of Deposit (CD) available at banks. Its primary purpose is to earn a fixed rate of return, often called dividends, on a deposited sum for a specific duration. This allows members to benefit from predictable earnings on funds they do not need for immediate expenses.

Key Characteristics

The interest rate, often called the dividend rate by credit unions, is fixed for the entire term of the certificate. This fixed rate means earnings do not fluctuate with market changes, providing a guaranteed return on the initial deposit. This predictability contrasts with variable-rate accounts where earnings can change over time.

Share term certificates are established for a specific duration, which can range from a few months to several years (e.g., 6 months, 1 year, or 5 years). The funds are generally held until this maturity date. Most certificates require a minimum initial deposit, which can vary widely among credit unions, often starting from $100 to $2,500. Interest is typically calculated on the principal balance and can be compounded daily, monthly, or quarterly, depending on the terms. This compounded interest contributes to the Annual Percentage Yield (APY).

Dividends can be paid out periodically (e.g., monthly or quarterly) or they can be reinvested back into the certificate to maximize earnings. Early withdrawal penalties are a key feature of these certificates. If funds are withdrawn before the maturity date, a penalty is typically assessed, often resulting in the forfeiture of a certain amount of earned or unearned dividends. These penalties can vary, sometimes ranging from 90 days to 365 days’ worth of interest, with longer terms generally incurring steeper penalties. Share term certificates are exclusively offered by credit unions, which are not-for-profit financial institutions.

Opening a Share Term Certificate

Opening a share term certificate begins with establishing membership at a credit union. Eligibility often depends on a “common bond” such as geographic location, employment, or affiliation with certain organizations. To become a member, individuals typically need to meet specific criteria and often open a basic savings account with a small initial deposit, sometimes as low as $5 to $25. Once membership is established, individuals can open a share term certificate.

To open a share term certificate, specific personal information and documentation are required. This typically includes a valid government-issued photo identification (such as a driver’s license or passport), proof of address (like a utility bill), and a Social Security number or Individual Taxpayer Identification Number for identification and tax reporting purposes. After meeting membership and documentation requirements, several key decisions must be made, including the amount of the initial deposit, which must meet the credit union’s minimum requirement for the chosen certificate.

Selecting the term length is another important decision, as longer terms generally offer higher dividend rates. Account holders also choose how they prefer to receive interest payouts, whether it’s through direct deposit to another account, or by having the dividends reinvested into the certificate. The application process can often be initiated in person at a credit union branch, online through the credit union’s website, or by phone.

Managing and Maturing a Share Term Certificate

Once a share term certificate is opened, account holders can typically monitor its progress through online banking platforms or by reviewing periodic statements. These tools provide details on accumulated dividends and the approaching maturity date. While additional deposits are generally not permitted after the initial funding, some certificates may allow deposits at maturity or during a grace period.

As the maturity date approaches, the credit union usually notifies the account holder of the upcoming options. At maturity, choices include automatic renewal, or “rollover,” for the same term at the current interest rate unless otherwise instructed. Alternatively, the principal and accumulated dividends can be fully withdrawn without penalty. Account holders may also choose to withdraw a portion of the funds and reinvest the remaining balance into a new certificate.

A grace period, typically seven to ten days after the maturity date, is often provided. This period allows the account holder to make decisions regarding renewal or withdrawal without incurring early withdrawal penalties. Should the need arise to access funds before maturity, initiating an early withdrawal requires contacting the credit union. Such withdrawals typically incur a penalty, often a forfeiture of a specified amount of dividends, which can reduce overall earnings or even impact the principal if earned dividends are insufficient.