What Is a Share Certificate Account and How Does It Work?

A share certificate account offers a structured way to grow savings by committing funds for a set period. These accounts are designed for individuals seeking predictable returns on money they do not need for immediate use.

Understanding Share Certificate Accounts

A share certificate account is a savings vehicle offered exclusively by credit unions. Unlike traditional savings accounts, it operates as a time deposit, meaning funds are held for a predetermined duration. The term “share” originates from the credit union structure, where depositors are considered members and part-owners of the institution, rather than just customers.

The money placed into a share certificate account contributes to the credit union’s overall capital, which is then used for lending and other operations. In exchange for committing funds for a fixed period, account holders receive earnings, often referred to as dividends, which are similar to the interest paid by banks. This arrangement allows credit unions to offer a higher rate of return compared to standard savings accounts.

Key Characteristics and Mechanics

Share certificate accounts are defined by their fixed terms and fixed dividend rates. Terms can range from as short as three months to as long as five years, or even up to ten years in some cases, with longer terms generally yielding higher dividend rates. This fixed rate means the earnings remain constant throughout the chosen term, regardless of market fluctuations.

A feature of these accounts is the early withdrawal penalty. Should funds be needed before the maturity date, a penalty is incurred, which involves forfeiting a portion of the earned dividends, such as 90 days or 180 days of earnings. In some instances, if insufficient dividends have been earned, the penalty may even reduce the principal amount. Dividends are commonly compounded daily or monthly and can be credited monthly or at the certificate’s maturity.

Upon the maturity date, account holders have several options. They can withdraw the principal plus accumulated dividends without penalty, renew the certificate for another term, or transfer the funds to another account. Many credit unions offer a grace period, around 7-10 days after maturity, during which these actions can be taken.

Types of Share Certificates

Beyond the standard fixed-rate, fixed-term share certificate, several variations offer different features to suit diverse financial goals.

Bump-up or Step-up Certificates

“Bump-up” or “step-up” certificates provide the option to increase the dividend rate once or twice during the term if market rates rise, potentially allowing for higher earnings. This flexibility can be appealing in an environment of increasing interest rates.

Add-on Certificates

“Add-on” certificates offer the unique ability to make additional deposits into the certificate after the initial funding, which is generally not permitted with standard certificates. This feature allows for continued growth of the investment over time.

Callable Certificates

“Callable” certificates give the credit union the right to close the account early, if market rates fall significantly. While offering slightly higher initial rates for this risk, they introduce an element of uncertainty for the account holder.

Opening and Managing Your Account

Opening a share certificate account requires identification and financial details. Prospective account holders need to provide government-issued identification, such as a driver’s license, along with their Social Security Number. An initial deposit is also necessary, with common minimums ranging from $500 to $1,000, though some credit unions may offer options with lower initial deposits.

The application process can be completed in person at a credit union branch or through an online application portal. Initial funding can be done via transfer from an existing bank account, direct deposit, or personal check.

Share Certificates vs. Certificates of Deposit (CDs)

Share certificates and Certificates of Deposit (CDs) are similar financial products, both serving as time deposits that offer fixed returns for a fixed period. The primary distinction lies in the financial institutions that offer them. Share certificates are offered by credit unions, which are member-owned, not-for-profit organizations. Conversely, CDs are provided by traditional banks, which operate as for-profit entities.

This difference in institutional structure leads to varying terminology; credit unions pay “dividends” to their members, while banks pay “interest” to their customers. Both products are federally insured, providing a high level of security for deposited funds. Share certificates are insured by the National Credit Union Administration (NCUA) up to $250,000 per depositor, per institution, per ownership category. Similarly, CDs at banks are insured by the Federal Deposit Insurance Corporation (FDIC) for the same amount and under similar conditions. Both types of earnings, dividends and interest, are considered taxable income.