What Is a Share Certificate at a Credit Union?

In this blog, we’ll explain what share certificates are, how they work, and how they’re different from other savings accounts. 

What is a Share Certificate?

A share certificate is a longer-term savings account offered by credit unions. With this type of account, the depositor (you) agrees not to touch the money you have deposited for a specific length of time. In exchange, the credit union agrees to pay interest (also known as a dividend) into your account, at a higher rate than you would get with a regular savings account. 

Because you’re earning higher dividends, you’re able to grow your savings more substantially. 

Share certificates come in a range of deposit amounts and term lengths, making them attractive options for people looking to build up their savings. Now that you know generally what they are, let’s get into the nitty gritty details of share certificates. 

How Does a Share Certificate Work?

Share certificates require minimum deposits and specified term lengths. The term length is a set period of time during which you, as the depositor, agree not to withdraw your money. Term lengths are typically anywhere from 3 months to 5 years. The longer term length you choose, the more dividends you will earn. 

While it is possible to withdraw money before the end of the term (which is when it “matures”), you will have to pay a  fee to do so. The interest your money earns can add up to significant additional savings in your account—as long as you leave the funds untouched until maturity. 

The deposit amounts vary by institution, but at Oxford Federal Credit Union, the minimum deposit is $500 for a 3-month term or $1,000 for any certificate that is 6 months to 5 years long. 

How is a Share Certificate Different from a Regular Savings Account?

A regular savings account will earn interest as well, but not on the scale of a share certificate, which is considered a high-yield savings account. Also, there are no term lengths associated with regular savings accounts, so you can withdraw money whenever you like without fear of incurring a penalty. 

Benefits of Share Certificates

If you’re looking to grow your savings safely over time, share certificates are an ideal option because they:

  • Have higher interest rates than regular savings accounts

  • Offer a variety of fixed-term rates ranging from 3 months to 5 years

  • Will automatically renew upon maturity (when the term ends)

  • Can be used as collateral for Share Secured Loans

  • Are federally insured up to $250,000 by the National Credit Union Association with an additional $250,000 of coverage available through Excess Share Insurance (ESI)

Drawbacks of Share Certificates

While there are many benefits to share certificates there are some drawbacks as well, such as:

  • No ability to add more money to the account during the term

  • No immediate access to funds during the term

  • If you withdraw funds before the term ends, an early withdrawal penalty may apply

  • A fixed interest rate that remains the same throughout the term

Choosing the Best Term Length and Interest Rate

So how do you know which term length to choose? That depends on the answers to a few questions. First, how much money do you have to invest? If it’s only $500, then you’ll choose a 3-month term, but if it’s $2,000 then you could choose anywhere from 6 months to 5 years.

Next, how long can you go without needing the money? If you’re certain you can keep it invested for 2 years without needing to withdraw any of it, then a 2-year term is ideal because you’ll earn more interest in the process.

Speaking of interest, since share certificates come with fixed-rate interest (one that never changes during the life of the term), you might want to hold off on opening one if interest rates are low—since you’ll be locked into that rate until your certificate matures. Conversely, if interest rates are high, you might open a share certificate at that time to take advantage of the rates.

What is Laddering? 

Laddering is an investment strategy whereby you open share certificates of varying term lengths that overlap in time. When the shorter-term certificates mature, you invest that money in medium to longer-term certificates, then open new short-term certificates, and begin the cycle again.

The benefit of laddering is that you’re able to take advantage of the longer term certificates’ higher interest rates while having more frequent access to the shorter terms’ funds. 

Additionally, you won’t get locked into a lower rate for a long time because you’re opening shorter term certificates and then can wait for rates to rise before investing the cash into medium or longer-term certificates.  

What Happens when the Term Ends?

When your share certificate term ends, you have some options. You can simply withdraw the money and spend it however you wish; you can roll the money into another share certificate (i.e. the laddering strategy above); or you can transfer the money into a checking or alternate savings account, such as a money market account. 

But remember, if you withdraw any money before the share certificate’s maturity date, an early withdrawal penalty may apply.

How to Open a Share Certificate with Oxford Federal Credit Union

We make it easy to open a share certificate account with Oxford Federal Credit Union! First, you must become a member of our credit union. Then, you can open a share certificate account online, by visiting a branch in person, or by calling us at 1.800.991.9219.

Why wait to build your financial future? Open a share certificate account today and get started!

OPEN A SHARE CERTIFICATE ACCOUNT ONLINE