CD & Share Certificate 101: A beginner’s guide.

A certificate of deposit (CD) and a share certificate are similar financial products that can safely and securely help you achieve your financial goals. Both offer guaranteed returns with minimal risk (and usually without fees). A certificate works like a savings account but there are crucial differences:

• Deposits are usually a single lump-sum.
• Deposits are held for a set term (anywhere from 3 months to five years).
• Withdrawing the initial deposit before the term is complete incurs a penalty, usually forfeiting any accrued interest and often including a fee.
• Certificates offer higher rates than saving accounts (as of March 1, 2023, our regular fixed-rate certificates are as high as 5.09% APY; APY = Annual Percentage Yield).

Read on for our consumer’s guide to certificates of deposits and share certificates.

The difference between a credit union and a bank defines the difference between a CD and a share certificate. Banks are for-profit entities and held privately or publicly; credit unions are member-owned and not-for-profit. With banks, profits become dividends paid to stockholders, while interest is paid to customers; with credit unions, dividends are paid to the members. The bottom line on that difference is small but meaningful: earning interest vs. receiving a dividend.

You may be a customer at a bank, but unless you are a stockholder you do not receive a dividend – you receive interest. As a credit union member, you are an owner – a co-owner, actually — and thus entitled to a dividend. Because a bank is a for-profit enterprise, they pay dividends to their stockholders in addition to the interest they pay their customers, leaving them smaller interest margins to offer compared to credit unions, which generally offer their members higher interest rates on deposit accounts.

Financial institutions offer certificate accounts to attract deposits, which they in turn use to make loans. Historically, longer term certificates offered higher yields, but in today’s interest rate environment, the best offers are for certificates with terms longer than six months but less than two years. The interest rates for certificates offered by credit unions are often higher than those of banks because the credit union does not need to save a slice off the top for its stockholders or owners.

Certificates are a smart option for parking money one might need later for a specific purpose or goal (say, a downpayment on a house or a car). They may not earn returns as high as money invested in stocks or mutual funds, but when held for the entire term, produce a guaranteed return. It is money you can count on. And at today’s rates, that can be a substantial amount of money.

For example, depositing $5000 into a 1-year fixed-rate share certificate earning 5.00% (5.09% APY) with quarterly compounded interest dividend yields $254.50. $100,000 in a 1-year fixed-rate jumbo certificate earning a 5.10% (5.20% APY) yields $5,200. When the term is over you can renew the certificate, including the dividend; pocket the dividend and reinvest the original deposit; or withdraw the original funds and dividend for whatever you wish.