What Is a CD or Share Certificate?

A Certificate of Deposit (CD) and a Share Certificate are types of savings accounts designed to hold a fixed amount of money for a specific period, offering a predictable return. They are generally considered secure ways to save money, providing a known return on investment.

Understanding Certificates of Deposit and Share Certificates

Certificates of Deposit (CDs) and Share Certificates function as time deposits, meaning funds are committed for a predetermined duration. When opening one of these accounts, you deposit a lump sum of money, which then earns interest at a fixed rate for the entire term. Common terms range from a few months to several years. Funds are locked until the maturity date, at which point you receive your initial deposit back along with the accumulated interest. This structure allows for predictable earnings, as the interest rate does not fluctuate with market changes during the term.

Key Features and Common Variations

These certificates offer a fixed interest rate, which is set at the time of opening and remains constant throughout the term. Minimum deposit requirements can vary significantly, with some institutions requiring $1,000 or more. An early withdrawal penalty is imposed if funds are accessed before the maturity date. This penalty typically involves forfeiting a portion of the interest earned, and in some cases, it can even affect the principal.

Several variations exist:

Jumbo Certificates

These require a higher minimum deposit, often starting at $100,000, and may offer slightly higher interest rates.

Callable Certificates

These give the issuing institution the option to redeem the CD before its maturity date, typically if interest rates decline, though they often pay a higher initial interest rate.

Step-Up Certificates

These feature predetermined interest rate increases at specified intervals throughout the term, allowing for potential boosts in earnings over time.

No-Penalty or Liquid CDs

These allow for early withdrawals without penalty, though they typically come with lower interest rates than traditional CDs.

Distinguishing Certificates of Deposit from Share Certificates

The primary distinction between a Certificate of Deposit (CD) and a Share Certificate is the type of financial institution offering them. CDs are typically offered by banks, while Share Certificates are provided by credit unions. Banks pay “interest” on CDs, whereas credit unions distribute “dividends” on Share Certificates to their members.

Both types of certificates offer a similar level of security through federal deposit insurance. Deposits in banks, including CDs, are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor. Share Certificates at credit unions are insured by the National Credit Union Administration (NCUA) up to $250,000 per depositor. This means your funds are protected up to these limits in the event of institutional failure.

Opening and Managing a Certificate

Opening a Certificate of Deposit or Share Certificate involves selecting a term length that aligns with your financial goals and determining the amount you wish to deposit. Longer terms typically offer higher interest rates, but it is very important to commit funds you will not need before the maturity date to avoid penalties. Identification, such as a Social Security number and a government-issued ID, will be required for account setup. The application process can often be completed in-person at a branch or through an online portal.

Upon reaching the maturity date, the institution will typically send a notification outlining your options. Common choices include automatically rolling over the funds into a new certificate with the current interest rate for the same term, withdrawing the principal and earned interest, or transferring the funds to another account. Most certificates include a grace period, usually ranging from 7 to 10 days after maturity, during which you can make a decision without incurring penalties. If no instructions are provided by the end of this grace period, the certificate will often automatically renew for another term at the prevailing rate.