Savings 101: What Is a Share Certificate?
With so many financial products available, choosing which type of account to open can be just as stressful as deciding where to open one. For consumers looking for earnings on their savings, one of the options that credit unions offer is share certificates. Here’s a brief overview of how they work and some of their advantages and disadvantages.
Share certificates are a type of credit union savings account very similar to the certificates of deposit, or CDs, offered at banks. These accounts usually offer higher yields than regular savings accounts; in exchange, you leave your money in the account for a specified amount of time, ranging typically from three months to five years. Longer lengths tend to have better rates than shorter ones. If you withdraw your money too early, you can be charged a penalty.
In addition, money put into one of these accounts by members of federally insured credit unions is safe. Share certificates and other accounts are generally insured for up to $250,000 through the National Credit Union Administration, or NCUA.
The dividends, or earnings, you can make on a share certificate are typically quoted in terms of the annual percentage yield, or APY. This rate takes into account the compounding period, which is the frequency with which returns are added to the account. Credit unions can choose to compound rates on a yearly, quarterly, monthly or even daily basis.
Early withdrawal penalties
If you withdraw money in a share certificate before the predetermined maturity date, you’ll typically be charged a penalty. The amount can be a portion of the earnings, such as 90 days of dividends, depending on the account agreement.
Types of certificates
Some credit unions offer variations on the product. Here are some of the most common:
If you wish to take advantage of the higher rates of a five-year certificate but don’t want to lock your money away for that long, you can set up a certificate ladder. This is a strategy in which you invest in certificates of different terms and roll the money over into a new certificate or withdraw it after each one expires. For example, if you invest $10,000, you can do the following:
Of the many savings products credit unions provide, share certificates offer a higher-yielding but still safe way to invest money for a set period of time. Consider whether the increased earnings offset locking away the money for the required time, and decide which one is right for you.
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