Share Certificates vs. CDs: What You Need to Know

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Understanding Share Certificates

A share certificate is the credit union equivalent of a certificate of deposit (CD). These financial instruments offer higher interest rates than traditional savings accounts and provide a secure place to store your money. However, accessing funds before the certificate matures may incur penalties, and there are often better options for long-term investments. Read on to learn how share certificates work, their pros and cons, and some alternatives to consider.

How Does a Share Certificate Work?

Share certificates function similarly to bank CDs. You deposit money into the account for a specified term and earn dividends on your investment, akin to the interest earned on a CD. Share certificates have fixed rates and terms ranging from a few months to several years, typically offering higher interest rates than traditional savings accounts. However, unlike savings accounts, you cannot add money to a share certificate after the term begins, and early withdrawals may result in penalties.

For example, if you deposit $10,000 in a 12-month share certificate with a 5% dividend rate, you will have $10,511.62 at maturity, assuming no early withdrawals. You can then either roll the funds into a new share certificate or withdraw them. If you choose to roll the funds, the new certificate will earn dividends at the current rate offered by the credit union, not the original rate.

Share Certificates vs. CDs

While share certificates and CDs operate similarly, there are key differences. Share certificates are available at credit unions, while CDs are offered by banks. The National Credit Union Administration (NCUA) insures share certificates at federally insured credit unions up to $250,000 per depositor, per institution, and per ownership category. In contrast, the Federal Deposit Insurance Corp. (FDIC) insures bank CDs up to the same limits.

Are Share Certificates a Good Idea?

Share certificates can be a good option for saving towards a specific goal, offering higher returns than traditional savings accounts. However, they may not be ideal for emergency funds due to potential penalties for early withdrawals. For long-term investments, other options may provide better returns. Here are some pros and cons to consider:

Pros

• Safety: Nearly all credit unions are insured by the NCUA, protecting up to $250,000 per account owner if the credit union fails.
• Higher Earnings: Share certificates typically offer higher interest rates than traditional savings accounts.
• Guaranteed Returns: Fixed interest rates guarantee returns for the certificate’s term.
• Certificate Laddering: Opening multiple share certificates with different maturity dates can provide access to funds at various intervals, helping avoid early withdrawal penalties.

Cons

• Limited Access: Funds are inaccessible until the certificate matures, with penalties for early withdrawals.
• Potential for Higher Returns Elsewhere: Long-term investments may yield better returns than share certificates.
• Fixed Interest Rates: Rates do not adjust if market interest rates rise after opening the certificate.

Alternatives to Share Certificates

If share certificates don’t meet your needs, consider these alternatives:

High-Yield Savings Account (HYSA)

HYSAs offer higher interest rates than traditional savings accounts and more liquidity than share certificates. However, rates can fluctuate, potentially decreasing after account opening.

Money Market Account

Money market accounts combine features of checking and savings accounts, offering higher rates than traditional accounts and providing checks and debit cards for easy access to funds.

Treasury Bills (T-bills)

Backed by the U.S. government, T-bills are purchased at a discount and redeemed at face value upon maturity. They offer terms from four to 52 weeks and can be sold before maturity without penalties. Interest earned is exempt from state and local income tax.

Is a Share Certificate Right for Me?

Share certificates are a low-risk way to save, offering fixed interest rates and terms that provide predictable returns. They can be ideal for short-term savings goals like a down payment on a house or car. However, due to potential penalties for early withdrawals, they may not be suitable for funds you need frequent access to or for long-term investments.

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