What are Share Certificates and How Do They Work

5 Min. Read

When it comes to saving money, everyone wants to find the best way to maximize their earnings while ensuring their funds remain secure. One attractive option offered by credit unions is the “Share Certificate”. But what exactly is a Share Certificate, and how does it work? Read on to find out more.

WHAT ARE SHARE CERTIFICATES?

A Share Certificate is a type of savings account that offers a higher dividend in exchange for the depositor’s commitment to leave their money in the account for a specified period.

Think of it as an agreement between you and the credit union: you agree not to withdraw your funds for a set amount of time, and in return, you receive a higher interest rate than a regular savings account. However, if you do need to access your funds before the term ends, you might incur an early withdrawal penalty.

So how does this maturity date work? How long does your money need to stay in the account? And is a share certificate really worth it?

HOW DO SHARE CERTIFICATES WORK?

Share Certificates function similarly to Certificates of Deposit (CDs) offered by banks. Here’s a step-by-step breakdown.

• Deposit Commitment: You choose an amount of money to deposit into the Share Certificate unless the amount minimum is specified.
• Fixed Term: You agree to leave this money in the account for a predetermined period, ranging from a few months to several years. This fixed term will depend on your savings goals and risks.
• Fixed Interest Rate: Credit unions offer a fixed dividend rate, often higher than regular savings accounts, which is paid out periodically.
• Maturity: At the end of the term, known as the maturity date, you can withdraw your initial deposit along with the earned dividends without any penalty.

Seems simple enough to gain more investment outcomes than a regular savings account.

ARE SHARE CERTIFICATES WORTH IT?

Share Certificates can be a valuable tool for savers looking to grow their wealth steadily and securely. Here’s why they might be worth considering:

• Higher Returns: The higher dividend rates mean your money grows faster compared to a regular savings account.
• Low Risk: Share Certificates are low-risk investments since they are insured by the National Credit Union Administration (NCUA) up to $250,000, similar to the FDIC insurance for banks.
• Fixed Rates: Knowing exactly how much you’ll earn over the term can help with financial planning and goal setting.

IS A SHARE CERTIFICATE BETTER THAN A CD?

Whether a Share Certificate is better than a CD depends on your individual financial situation and goals. Here are some key points to consider:

• Interest Rates: Both Share Certificates and CDs typically offer higher interest rates than regular savings accounts. The rates can vary between institutions, so it’s worth comparing the offerings from credit unions (for Share Certificates) and banks (for CDs).
• Membership: Share Certificates are available through credit unions, which usually require membership. If you’re already a member of a credit union, a Share Certificate might be a convenient option.
• Early Withdrawal Penalties: Both Share Certificates and CDs generally have penalties for early withdrawals. The terms of these penalties can vary, so it’s important to understand them before committing.

In both situations, the profit from these accounts is presented as an annual percentage yield (APY), which represents the actual return on your balance once compound interest is taken into account. Identifying the APY offered by a bank or credit union can aid in making precise comparisons when searching for a new account.

Lastly, both share certificates and CDs have federal government backing in the event of a financial institution’s failure. Bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC) and credit union accounts by the National Credit Union Administration (NCUA). Both organizations provide insurance coverage for deposits up to $250,000 per depositor, per institution, per ownership category.

WHEN SHOULD YOU CONSIDER GETTING A SHARE CERTIFICATE?

Share Certificates are an ideal choice in several instances. They are perfect for short to medium-term goals, such as a specific savings goal with a defined timeline. For example, if you are saving for a down payment on a house or planning a future vacation, you can lock in a higher rate with a Share Certificate to reach your goal faster.

They are also suitable for stable savings if you have excess funds that you won’t need immediate access to. You can place this money in a Share Certificate for better returns than a regular savings account. Furthermore, adding Share Certificates to your savings strategy can diversify your portfolio by providing a balance of safety and higher returns, complementing other investment types.

CAN YOU ADD MONEY TO A SHARE CERTIFICATE?

Generally, once you open a Share Certificate, you cannot add more money to it during its term. This is because the terms, including the interest rate and maturity date, are fixed at the time of opening. However, you can always open additional Share Certificates if you have more funds to invest later on. Some credit unions may offer “add-on” Share Certificates, but these are less common, so it’s best to check with your credit union.

CAN YOU CASH OUT A SHARE CERTIFICATE?

If you decide to cash out a Share Certificate before the end of its term, you will likely incur an early withdrawal penalty. This penalty can vary between credit unions but often involves losing some or all of the interest earned or paying a fee equivalent to a few months’ worth of dividends.

The penalty for early withdrawal might mean forfeiting a portion of the interest earned. For example, if you withdraw funds early, you might lose interest earned over the last six months.

While you may lose some interest due to penalties, your principal amount (the initial deposit) is typically protected. However, it’s crucial to check the specific terms and conditions of your Share Certificate agreement with your credit union.

QUESTIONS TO CONSIDER FOR SHARE CERTIFICATES

Deciding whether a Share Certificate is the right savings instrument for you involves careful consideration of your financial goals, needs, and circumstances. Here are some essential questions to ask yourself:

Questions to Ask Yourself:

• What are my financial goals?
• Am I saving for a specific goal, such as a down payment on a house, a vacation, or an emergency fund?
• Do I need a predictable return on my investment for a particular timeframe?
• Can I commit to the time period?
• How much risk am I willing to take?
• Do I prefer a fixed rate of return over the potential for higher, but more volatile, returns from other investments like stocks?
• Do I understand the penalties of early withdrawal?
• How does a Share Certificate align with my overall savings and investment strategy?
• Have I compared Share Certificates with other savings products like Certificates of Deposit (CDs), savings accounts, and investment accounts?
• Am I a member of a credit union or willing to become one?

CREATE A NEW SAVINGS ROUTE WITH A SHARE CERTIFICATE

Share Certificates are a valuable savings instrument for those looking to earn higher dividends while securing their funds for a set period. By understanding how Share Certificates work and evaluating whether they align with your financial goals, you can make a well-informed decision.

At Marine Credit Union, we are dedicated to helping our members achieve financial stability and growth. If you’re ready to take the next step towards a more secure financial future, consider opening a Share Certificate with us today.

View our rates or visit your local branch to learn more about our competitive rates and flexible terms. Start building your wealth with confidence—join Marine Credit Union and invest in your financial success!