What Is a Share Certificate Account?
Demystify share certificate accounts. Learn about this credit union savings option, its fixed interest, and how to assess if it's right for you.
A share certificate account is a specific type of savings product available exclusively through credit unions. This financial instrument functions as a time deposit, requiring individuals to commit a sum of money for a predetermined duration. During this fixed period, the funds within the account earn a set rate of return. This offers predictable earnings, making it a suitable option for those with financial goals that extend beyond immediate liquidity.
Core Characteristics
Share certificate accounts are distinct in that they are offered solely by credit unions, differentiating them from Certificates of Deposit (CDs) provided by banks. The term “share” within a credit union context signifies that a deposit represents an ownership share within the cooperative institution. Funds placed into a share certificate are committed for a fixed term, which can vary widely to suit different financial plans.
The dividend rate on a share certificate is determined at the time the account is opened and remains constant for the entire duration of the chosen term. This fixed rate ensures that the earnings are predictable. The fixed term means that the funds are held for a pre-defined period, which could range from a few months to several years. This structure provides a stable environment for savings to grow without being subject to market fluctuations during the certificate’s term.
Understanding Terms and Returns
Interest on a share certificate account is typically accrued and paid out at regular intervals or at the certificate’s maturity. The annual percentage yield (APY) quoted for a share certificate accounts for the effect of compounding. When the predetermined term ends, the share certificate reaches its maturity date. At this point, the account holder generally has several options: renew the certificate for a new term, withdraw the principal and earned dividends, or transfer the funds to another account within the credit union.
A significant feature of share certificates is the early withdrawal penalty. If funds are withdrawn before the maturity date, a penalty is typically incurred, which usually results in the forfeiture of a portion of the earned or accrued dividends. The exact penalty structure can vary among credit unions but often involves surrendering a certain number of days or months of dividends, depending on the original term length. This penalty serves to enforce the fixed-term commitment. In some cases, if insufficient dividends have been earned, the penalty may even be deducted from the principal amount.
Key Considerations
When evaluating a share certificate account, several factors warrant consideration. Term lengths for these accounts are diverse, commonly ranging from three months to five years or longer. Selecting an appropriate term directly impacts the liquidity of the funds, as longer terms generally offer higher dividend rates but tie up the money for extended periods.
Minimum deposit requirements vary among credit unions. Understanding the specific early withdrawal penalty structure of a particular share certificate is also important. Deposits in share certificate accounts are protected by federal insurance through the National Credit Union Administration (NCUA). This coverage extends up to $250,000 per depositor, per federally insured credit union, providing a layer of security similar to FDIC insurance for bank accounts.