Are share certificates worth it?
Share certificates can be a good investment; however, you should consider your financial goals and needs. If you want heightened earning power, a share certificate is a great option, but you should know that funds cannot be withdrawn for a set time. If you need immediate access to your funds, a more liquid account, such as a money market account, may be your best option.
At Credit Union of Southern California (CU SoCal), we make opening a share certificate account easy!
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgages, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
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What are share certificates?
Share certificates are uniquely different from traditional savings accounts because they require money to be held in the account for a specific period, such as 90 days, six months, nine months, one year, etc.
Share certificates are offered by credit unions and are equivalent to certificates of deposit (CDs) that are offered exclusively by banks. The only difference between share certificates and certificates of deposit is the name.
How do share certificates work?
To open a credit union share certificate account requires that you deposit the minimum required opening amount. You may also deposit more than the required minimum. During the specific term (timeframe) that the money remains in the account a fixed rate dividend is earned.
For example, CU SoCal offers a range of
share certificates with varying timeframes and dividend rates. Longer timeframes typically yield higher dividend rates.
The interest earned on a share certificate is expressed as a “dividend yield.” This is because credit unions are member-owned organizations in which customers are members and shareholders in the credit union. When a share certificate earns interest, it’s considered a dividend.
At CU SoCal, dividends are compounded every month and at maturity. A compound interest is interest that is earned on interest, so your money grows faster.
During the term of the share certificate, money cannot be withdrawn from the account. Most credit unions will only allow money to be withdrawn in certain emergency situations and a penalty fee will be charged.
CU SoCal offers share certificates with flexible maturity dates from 1 to 60 months.
The end of the term is called the maturity date. At that time the full balance of the certificate may be withdrawn without penalty.
Benefits of share certificates
Here are some of the benefits of investing in share certificates.
Safe investment. All credit union deposits are insured by the National Credit Union Administration (NCUA) for up to $250,000. The NCUA is an independent agency created by the U.S. government to regulate and protect credit unions and their owners. This makes credit unions as
safe as traditional banks. Bank deposits are federally insured by the FDIC for up to 250,000.
Fixed-interest rates. All share certificates, no matter the term (length the certificate must be held), provide a guaranteed rate of return (dividend). The more money you deposit, the more interest you’ll earn.
Higher interest rates compared to other investments. Certificate interest may be higher than rates on traditional savings accounts. A certificate may be worth it if you have a large sum of money to set aside.
No maintenance fees. Share certificate accounts are not charged account maintenance fees.
Low deposit requirements. For example, you can open a share certificate at CU SoCal with a low minimum deposit of only $1,000.
Multiple term options. Most credit unions provide terms to choose from, such as 3-, 6-, 9- months, 1-year, etc. The longer the term, the higher the corresponding dividend/APR.
Drawbacks of share certificates
As with all financial investments, drawbacks associated with share certificates. This content doesn't need to contain too many details; it just needs to segue into the Header structure listed below:
Early withdrawal fees. If you need your money before the end of the term you will be charged a penalty fee.
Interest rates could increase. If you put your money into a share certificate and the rate goes up, you won’t be able to take advantage of the higher rate until after your certificate matures. Depending on the term you selected, this could mean waiting six months, nice, months or a year.
Comparatively low returns. Some high-interest savings accounts and money market savings accounts may pay a higher rate of interest, and you’ll have more access to your funds.
Tax burden. According to the
IRS, the interest paid on certificate is taxable.
Share certificates vs. CDs: what's the difference?
Share certificates and Certificates of deposit (CDs) are both types of savings accounts and are essentially the same. The main difference is that share certificates are offered by credit unions and CDs are offered by banks. Share certificate yield dividends, whereas CDs earn interest.
When opening a share certificate or a CD account you’ll need to be able to deposit the minimum opening amount (you can open the account with more than the minimum too). You’ll also choose the term, during which a specific interest rate will be earned.
Alternatives to share certificates
There are times when the stock market and other instruments and investment strategies may pay higher yields and dividends than share certificates. All financial investments come with pros and cons.
Here is a look at some alternatives to share certificates
High-yield savings accounts. High yield savings accounts have minimum balance requirements If you can meet that minimum, you’ll be rewarded with a higher interest rate earned on your savings.
Bonds. The U.S. Securities and Exchange Commission defines a bond as a debt security, like an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time. When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it "matures," or comes due after a set period.
Treasury inflation-protected securities (TIPS). According to TreasuryDirect.gov, TIPS are set up to protect you against inflation. Unlike other Treasury securities, where the principal is fixed, the principal of a TIPS can go up or down over its term. When the TIPS matures, if the principal is higher than the original amount, you get the increased amount. If the principal is equal to or lower than the original amount, you get the original amount. TIPS pay a fixed rate of interest every six months until they mature.
Because we pay interest on the adjusted principal, the amount of interest payment also varies. You can hold a TIPS until it matures or sell it before it matures. TIPS are available in 5-, 10-, or 30-year terms.
Dividend stocks. A stock is a unit of equity also referred to as a “share.” Publicly traded companies sell shares of stock to investors as a way of raising money. Some stocks pay a dividend per share. Dividends are paid based on the company’s profitability.
Life insurance. There are various types of life insurance and one type, called “permanent life insurance” from which you may be able to withdraw cash value. Two types of permanent life insurance that may have cash value are “whole life” and “universal life.”
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
Get Started on Your Share Certificate Account Today!