Share certificates 101: Get the high yield of a CD, plus the benefits of belonging to a credit union

So what is a share certificate? And should you be putting your money in one? Here’s what you need to know.

What is a share certificate?

A share certificate is a type of savings account offered by credit unions, according to Amy Coe, vice president of deposit operations at MSU Federal Credit Union. These accounts offer a higher dividend rate (the credit union version of an interest rate) because the depositor agrees not to withdraw the funds for a set time frame. If you pull out your money before the maturity date, an early withdrawal penalty may apply.

How does a share certificate work? 

When you put your money in a share certificate, you agree to keep your money on deposit for a set period of time, known as the term. Share certificate term lengths can vary anywhere from three months to 10 years, depending on what the particular credit union offers. 

Once the share certificate matures, you have a few choices regarding what to do with the money. “The member determines at the end of that time period if they would like to keep the funds in the account for that time period again, if they would like to change the term or amount, or if they would like to withdraw the funds,” Coe says. 

Again, if you choose to withdraw funds from the share certificate prior to its maturity date, you’ll likely have to pay a fee. Early withdrawal fees are often expressed as a certain number of days’ worth of interest, and may vary according to the certificate’s term length. So it’s important to choose a term that allows you to earn a solid APY without locking up your money for too long.

Share certificate vs. CD: What’s the difference?

Now, you might be thinking, “A share certificate seems a lot like a CD.” And you’d be right: A share certificate is essentially the same thing as a certificate of deposit. 

However, since credit unions are financial cooperatives that are owned by members (as opposed to banks, which are for-profit businesses), there are a couple of nuances to how share certificates work.

For one, while banks offer deposit accounts that pay interest, members of credit unions have “share” accounts that pay dividends. “The members are shareholders in the credit union, which is why they are referred to as dividends,” says Lori Gravitt, an assistant vice president and branch manager at Addition Financial Credit Union. 

In both cases, however, the earnings on these accounts are expressed as an annual percentage yield (APY). This is the real return on your balance when compound interest is factored in. Knowing the APY a bank or credit union offers can help you compare apples to apples when shopping around for a new account.

Additionally, per the Truth in Savings Act, federally chartered credit unions are not actually allowed to use the term “certificate of deposit” or “CD” because they offer share accounts. Therefore, Coe says, credit unions offer share certificates (which can also simply be called “certificates”).

Finally, both share certificates and CDs are backed by the federal government in case the financial institution fails. Bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC) and credit union accounts are insured by the National Credit Union Administration (NCUA). Both entities cover deposits up to $250,000 per depositor, per institution, per ownership category. 

Pros and cons of share certificates

A share certificate can be a secure way to set aside your savings and earn some interest, among other advantages. However, there are some important drawbacks to consider, too.

Pros of share certificates

• Guaranteed return: Once you put your money in a share certificate, the dividend rate you agreed to never changes. So you can rest assured that your money is protected from fluctuations in the markets and economy.
• Higher dividends: Share certificates generally offer higher interest rates compared to traditional savings accounts. “Interest rates have been going up and they are a great way to earn some extra funds,” Gravitt says.
• Low risk: You generally can’t lose any of your principal investment in a share certificate. Plus, your funds are insured by the NCUA.

Cons of Share Certificates

• Limited liquidity: Unlike other types of share accounts, you have to keep your money on deposit for a set period of time in order to earn the full APY. If you need to pull your money out early, you’ll have to pay a penalty. In this sense, Gravitt says that share certificates don’t offer the same advantages of share savings and money market accounts.
• Opportunity cost: By locking your money in a share certificate, you might miss out on potentially higher dividends if rates go up. However, you can mitigate some of this risk by creating the equivalent of a CD ladder.
• Lower returns compared to market investments: While safer, the returns on a share certificate are generally lower compared to riskier investments such as stocks, mutual funds, and other securities. This means share certificates aren’t the best choice when it comes to long-term financial goals such as retirement.

How to open a share certificate 

Decided that a share certificate is right for you? Here are the general steps you’ll need to follow in order to open one:

1. Research your options: Just like regular CDs, the interest rates, term lengths, and other requirements for share certificates vary quite a bit. So it’s important to shop around and look for an account that suits your needs, such as a competitive APY, low minimum balance requirement, or specific term.
2. Determine your membership eligibility: Unlike banks, credit unions have membership criteria based on factors such as location, employment, or association with certain groups or organizations. So before you can open a share certificate, you’ll need to become a member of that credit union, assuming you fit the field of membership. (Once you’re approved to join, opening and depositing money in a share account establishes your membership.) 
3. Gather necessary documents: Before you sit down to fill out an application, having a few key details handy will help streamline the process. Exact requirements vary, but in general, you’ll need your identification, Social Security number, and banking information to fund the new account. 
4. Complete the application: This can often be done online, though many credit unions also give you the option to apply over the phone or in person at a branch. Be sure that all the information in your application is complete and accurate so there are no delays. 
5. Fund the share certificate: Once you’re approved, you can fund the share certificate with the amount you’ve decided to invest. This is often done by transferring funds from an existing account, but you may also be able to provide a check or another form of payment.

Frequently asked questions

What is the difference between a CD and a share certificate?

A CD and a share certificate are essentially the same type of product, except that CDs are offered by banks and share certificates are offered by credit unions.

Are share certificates FDIC insured?

The FDIC insures banks, so share certificates are not FDIC-insured. However, they are still protected by the federal government through the NCUA up to $250,000 per depositor, per institution.

Is a share certificate a good investment?

Whether or not a share certificate is a good investment depends on your financial goals. If you’re looking for a safe place to keep short-term savings and earn a modest amount of interest, then a share certificate can be a great place to put your money.

Can you cash out a share certificate?

Yes. One of the benefits of a share certificate is that you can choose how long you want to keep your money on deposit, whether it’s just a few months or a few years. Once your account reaches maturity, you can cash out the balance. However, if you withdraw funds before the maturity date, you will likely pay an early withdrawal penalty.