What Is a Certificate of Deposit at a Credit Union?

A Certificate of Deposit (CD) is a type of savings account designed to hold a fixed sum of money for a predetermined period. This financial tool is generally considered a low-risk option for individuals seeking to grow their savings. It provides a structured way to earn a return on funds not immediately needed.

Understanding Certificates of Deposit

A Certificate of Deposit requires an investor to deposit a specific amount of money for a set duration, known as the term. Terms range from a few months to several years. In exchange for committing these funds, the financial institution pays a fixed interest rate, which is typically higher than rates offered on standard savings accounts. Interest on a CD can accrue through simple or compound interest; with compound interest, earned interest is periodically added to the principal, allowing subsequent interest to be calculated on a larger sum.

The CD reaches “maturity” at the end of its specified term, at which point the original principal and all accrued interest are returned to the investor. CDs are distinct from regular savings accounts because they impose penalties for early withdrawals. These penalties discourage premature access to funds and ensure the fixed-term commitment. The exact penalty amount can vary by institution and the CD’s terms, often involving the forfeiture of a portion of the interest earned.

CDs at a Credit Union

Certificates of Deposit offered by credit unions, often referred to as share certificates, share many similarities with those from traditional banks but have distinct features. Credit unions are member-owned, not-for-profit financial cooperatives, meaning their earnings are typically returned to members through benefits like higher savings rates or lower fees. This structure can lead to more competitive CD rates compared to some for-profit banks.

Credit unions require membership, often based on a “common bond” such as living in a specific community, working for a particular employer, or belonging to an association. Deposits at a federally insured credit union are protected by the National Credit Union Administration (NCUA). NCUA insurance covers up to $250,000 per depositor, per institution, for each ownership category, offering similar protection to FDIC insurance for banks.

Choosing the Right CD

Selecting a Certificate of Deposit involves evaluating several factors. The term length of a CD directly impacts both the interest rate and liquidity; longer terms typically offer higher rates but restrict access longer. Shorter-term CDs provide more flexibility but usually come with lower rates. When comparing CDs, the Annual Percentage Yield (APY) is a crucial metric, as it reflects the total interest earned over a year, accounting for compounding. This allows for an accurate comparison of different CD offerings.

Understanding early withdrawal penalties is equally important, as these fees can significantly reduce overall returns if funds are needed before maturity. Beyond standard CDs, various types cater to different needs. Jumbo CDs, for instance, require a larger minimum deposit, often $100,000 or more, and may offer slightly higher rates. No-penalty or liquid CDs provide greater flexibility, allowing withdrawals without penalty after an initial short lock-up period, though they typically offer lower APYs than traditional CDs. Other variations include bump-up CDs, which allow a one-time rate increase if market rates rise, and step-up CDs, with automatically scheduled rate increases over the term.

Opening a CD

Opening a Certificate of Deposit at a credit union typically begins with establishing membership. This often involves meeting the credit union’s common bond requirement. To complete the membership application, individuals need to provide a government-issued identification, their Social Security number, and proof of address. An initial deposit, often nominal, may be required to open a basic savings account, which signifies membership.

Once membership is established, the CD application process can be completed in person at a branch, online, or over the phone. Funding the CD can be done through various methods, including transferring funds from an existing checking or savings account, setting up a direct deposit, or using a check or wire transfer. The credit union will provide a disclosure statement outlining the CD’s specific terms, including the fixed interest rate, maturity date, and any applicable early withdrawal penalties, all of which must be reviewed and agreed upon before finalizing the account.