What Are Share Draft Accounts at a Credit Union and How Do They Work?
Explore how share draft accounts at credit unions function, including their benefits, access methods, and application process.
Credit unions offer a variety of financial products, one of which is the share draft account. These accounts are similar to checking accounts at traditional banks but come with features specifically designed for credit union members. Understanding their structure and benefits can help individuals make informed financial decisions.
Account Structure
A share draft account reflects the cooperative nature of credit unions. Opening one involves purchasing a share in the credit union, making you a member with voting rights. This ownership aspect distinguishes it from conventional checking accounts.
These accounts often come with tiered options based on factors like balance or transaction volume. For instance, a basic account might waive monthly fees, while premium options could offer higher dividend rates or additional perks. This flexibility allows members to choose accounts that meet their financial needs.
Share draft accounts are insured by the National Credit Union Administration (NCUA) up to $250,000 per depositor, ensuring funds are protected in case of credit union failure. Credit unions also comply with the Truth in Savings Act, providing transparency in account terms, fees, and dividend rates.
Dividend Earnings
Share draft accounts often pay dividends, similar to interest, as a reward for maintaining a balance. Dividend rates vary depending on the credit union’s financial health and market conditions. Premium accounts may offer higher rates to encourage larger balances.
Dividends are generally calculated using the average daily balance method, which averages daily balances over a month. Credit unions issue a Form 1099-INT for members earning $10 or more in annual dividends, as these are considered taxable income. Knowing how dividends are calculated helps members maximize their earnings.
Access Methods
Share draft accounts provide multiple ways to access funds, including checks, debit cards, and online payment systems.
Checks
Checks allow account holders to authorize payments to specific recipients. These transactions are governed by the Uniform Commercial Code (UCC), ensuring legal compliance. Regulation CC permits credit unions to place holds on checks to mitigate risks of insufficient funds.
Debit Cards
Debit cards linked to share draft accounts offer instant access to funds for purchases. These cards are protected under the Electronic Fund Transfer Act (EFTA), which safeguards consumers in electronic transactions. Credit unions may set daily transaction limits to reduce fraud risks, and transactions are processed through networks like Visa or Mastercard, providing additional protection.
Online Payments
Online payment systems enable members to manage accounts digitally, pay bills, and transfer funds. The E-Sign Act ensures electronic records and signatures are legally binding. Secure platforms, often identified by encryption standards like SSL or TLS, are essential for safe transactions. Mobile apps enhance convenience with real-time account access and transaction alerts.
Fees and Minimum Balances
Understanding fees and minimum balance requirements is critical. Credit unions may charge fees for services like overdraft protection, typically ranging from $20 to $35 per incident. Maintaining a minimum balance can help members avoid monthly maintenance fees, especially when combined with features like direct deposits.
Application Steps
Opening a share draft account requires meeting membership criteria, which may include geographic location or employment affiliation. Applicants must provide documentation such as proof of residence or employment verification. The process involves completing a membership form and making an initial deposit, usually between $5 and $25, to secure membership in the credit union.
After opening the account, members should review the terms and conditions carefully. Many credit unions also offer financial counseling to help members make the most of their accounts.
Overdraft Options
Overdraft protection options can help members avoid insufficient funds issues. One approach is linking the share draft account to a savings account, with transfer fees typically ranging from $5 to $10 per transaction. Regulation D limits certain savings account withdrawals to six per month.
Another option is an overdraft line of credit, which acts as a pre-approved loan with lower interest rates than credit cards. This can be a cost-effective solution for occasional overdrafts.
Courtesy pay programs temporarily cover overdrafts up to a set limit, with fees averaging $30 to $35 per transaction. Members should use this sparingly to avoid financial strain. Exploring overdraft options can help members maintain financial stability.