What Is a Share Certificate CD and How Does It Work?
Share certificate CDs explained: a credit union savings vehicle providing secure, fixed returns.
A share certificate CD is a savings vehicle for growing funds securely over a specified period. Available primarily through credit unions, it allows individuals to deposit money for a fixed term, earning predictable returns. It serves as an attractive option for those seeking a stable and low-risk avenue for their savings, distinct from more volatile investment opportunities.
What is a Share Certificate CD
A share certificate CD is a type of time deposit account exclusively offered by credit unions. Unlike traditional banks, credit unions operate as not-for-profit organizations, and their members are considered part-owners. This ownership structure is reflected in the term “share,” signifying that members purchase “shares” in the credit union, which are then utilized to fund these certificates. This arrangement allows credit unions to often pass on earnings to members through competitive rates.
When opening a share certificate, an individual commits a specific sum of money for a predetermined duration, ranging from a few months to several years. In return, the credit union provides a fixed dividend rate, which is the equivalent of interest in a bank CD. Funds deposited into a share certificate are federally insured up to $250,000 by the National Credit Union Administration (NCUA), offering security for the principal. This structure allows savers to benefit from a guaranteed return without exposure to market fluctuations.
Key Features of Share Certificates
A key feature is the fixed dividend rate, or Annual Percentage Yield (APY), locked in for the certificate’s duration. This provides predictable earnings, showing how much the investment will yield by maturity. Terms vary widely, commonly ranging from three months to five years, though some institutions offer terms as short as 60 or 90 days or as long as 10 years. Generally, longer terms tend to offer higher dividend rates, rewarding a greater commitment of funds.
Dividends earned on share certificates are typically compounded daily or monthly, with earnings often credited to the account monthly or quarterly. This allows earnings to generate further earnings, contributing to principal growth.
A significant consideration is the early withdrawal penalty. Should funds be withdrawn before maturity, a penalty is usually imposed, often calculated as a forfeiture of dividends. This penalty can reduce the principal if insufficient dividends have been earned, highlighting the importance of committing funds not needed during the term. Upon maturity, many share certificates offer an automatic renewal option, typically providing a grace period of around seven to ten days for changes without penalty.
Opening a Share Certificate
Opening a share certificate requires credit union membership. Eligibility is typically based on a “common bond,” such as residing in a specific community, working for an affiliated employer, or belonging to a particular association.
Once eligible, opening a share certificate involves providing standard identification and financial information. Required documentation commonly includes a valid photo identification, such as a driver’s license, and a Social Security number. Proof of residence may also be requested to verify the applicant’s address.
An initial deposit is necessary to fund the share certificate, with minimum deposit requirements varying among credit unions, often ranging from $100 to $1,000, although some institutions may require higher amounts. After fulfilling these requirements and selecting a term, the funds are committed, and the share certificate becomes active. The application can frequently be completed through various channels, including online platforms, telephone, or in-person at a credit union branch.