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How Do Credit Union Share Certificates Work?

Published: June 2, 2023

How Do Credit Union Share Certificates Work?

Called share certificates when offered by nonprofit, member-owned credit unions, this version of the classic ‘timed deposit’ product tends to have the highest rates among federally insured bank accounts. Here’s a breakdown of various factors that make up a certificate.

Certificate Rates

Unlike regular savings accounts, most certificates earn the same rate over time. This can be a plus if you lock in a high rate, then see rates across banks fall. And it can be a negative when you’re looking at low rates that may rise soon.

Certificate Terms

You must choose a specific time frame to open a certificate. Terms generally range from three months to five years, and terms can impact both rates and early withdrawal penalties, which are fees charged if you cash out before the term ends. Generally, the longer the term, the higher the rate.

Certificate Safety

Certificates have federal deposit insurance up to $250,000 at credit unions insured by the National Credit Union Administration and at banks insured by the Federal Deposit Insurance Corp. This means you are guaranteed to get your money back, if a financial institution fails. Learn more about NCUA share insurance.

Certificates at a Bank vs. Credit Union

These two types of banking institutions have different names for this time-based account. Banks call them CDs and the returns you earn interest. Credit unions call them share certificates (or certificates) and the returns are known as dividends. This is because credit unions are not-for-profits where the account holders are owners of the credit union. That differs from banks, where account holders aren't considered owners and function more like lenders. Banks borrow account holders' money in deposit accounts such as CDs, and thus pay interest in return for the ability to use it.

How Does Certificate Interest Work?

Certificate interest works like it does in regular savings accounts. Interest gets compounded over time, meaning you earn interest on the initial deposit and the accrued interest that the certificate earns. Compounding takes place in regular intervals, such as daily or monthly. The difference between interest in certificates and savings accounts is that certificates have a fixed deposit, while savings accounts allow for ongoing contributions.

Are Certificate Rates Going Up?

Yes, certificate rates are currently on the rise. At this time in 2022, the nation’s average APY, or annual percentage yield, for a 24 month certificate was just 0.27% according to FDIC data.* Today, our 24-month certificate rates now top 5.00% APY.**

Do Certificates Have Fees?

Certificates have only one type of fee, an early withdrawl penalty, and it occurs when you withdraw money from a certificate before its term matures. The penalty ranges from a few months’ to a year’s worth of interest.

Certificate Strategies

There are a few ways to get creative with your use of certificates.

  • A certificate ladder involves dividing up an investment into several CDs of different term lengths. When each certificate matures, place that money into a new long-term certificate so that you take advantage of potentially higher rates offered over time.
  • A certificate barbell can resemble a ladder without middle rungs. You split an investment into long-term and short-term certificates, with the goal of waiting for higher rates before putting all your money into long-term certificates.
  • A certificate bullet strategy consists of one or multiple CDs that have around the same maturity date. The goal is to build savings for a big purchase years away, such as a down payment on a home.

What Are Certificate Rates Right Now?

Learn More

APY = Annual Percentage Yield. The dividend period on your account begins from the date that your account is opened and ends on the maturity date unless renewed. The minimum balance required to open a share certificate is $1,000. You will earn dividends for every day during the period that your account equals or exceeds the minimum daily balance requirement. Early withdrawal penalties may reduce earnings. Changes without penalty are allowed ten days from the maturity date. See Fee Schedule at ussfcu.org/fees for more details. Membership eligibility is required. Federally insured by NCUA.

*FDIC National Rates May 16, 2022. The information provided in this article is for educational purposes only. Original article: How Do CDs Work? Learn How to Save Smarter

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