The ultimate guide to how certificates work

Middle-Aged Couple Look at Guide Map While On A Vacation Made Possible By Interest They Earned On An Alliant Certificate.
August 22, 2023 | Lois Sullivan

How do certificates work? 

Certificates are savings accounts, usually with higher interest rates and term periods varying between three months and five years. Typically, the longer the maturity period the higher the interest rate. Individuals can open a certificate and earn interest on the principal until the certificate reaches its maturity. Upon maturity, you receive the initial investment value as well as the value of the accrued interest. 

The certificate disclosure lists a certificate's terms, its interest rate, whether the interest rate is variable or fixed, and potential early redemption penalties. Credit unions and banks offer and administer most certificates.


What is a jumbo certificate? 

A jumbo certificate works just like a regular certificate, except with higher minimum deposit requirements and typically a higher rate of return. Investing more is usually done through a jumbo certificate, and while the minimum investing requirements vary depending on the financial institution, it's typically $75,000 to $100,000.

The average rate of return on both regular certificates and jumbo certificates fluctuates, so it's essential to review current rates before investing to ensure they’re right for you. You can find jumbo certificates at most credit unions and banks, with rates varying depending on the length of the investment. Your financial institution will set the terms of your certificate, and you can choose the term and the renewal options.

Certificates vs. stocks

Certificates are more stable investment vehicles than stocks. Stocks represent an ownership share in a company and might  provide voting rights, depending on the class of stock. It's also less risky to regain your investment by redeeming a certificate than by selling stocks, because you're guaranteed to receive your principal plus any interest payments you received beforehand. Stocks can be risky because you lose money if the company's value drops. However, selling stocks doesn't carry a penalty, while certificate issuers might impose penalties for early redemption. 

Stocks can be volatile. Their value fluctuates, and you could lose your investment principal after just a single market shock. You might be able to withstand temporary losses if your focus is on long-term investments. Unlike stocks, certificates don't lose value. Your investment can only grow over time. You can use certificates for any type of investment, whether short-term or long-term.

How to open a certificate

You can easily open a certificate at a credit union or other financial institution. Many investors choose financial institutions where they already have accounts because it's easier to transfer money from the primary account to the new certificate. Otherwise, the main factor to consider is the annual percentage yield (APY), which is the return rate for your investment. 

You choose the length of your certificate term. If you're confident you won't need to withdraw the funds and risk early redemption penalties, you might be comfortable choosing a longer-term certificate. Otherwise, a shorter-term certificate might be better for your financial needs. 

Certificate insurance limits

Certificates are a low-risk investment because they are insured up to $250,000. The National Credit Union Administration (NCUA) covers deposits and certificates at credit unions and the Federal Deposit Insurance Corporation (FDIC) covers certificates issued by banks.*

Redeeming certificates

When you redeem a certificate, your credit union or bank will issue you a check or transfer the funds directly to one of your other accounts. When the certificate reaches its maturity date, many financial institutions will offer you the option of renewing the certificate's term. They're legally obligated to remind you of the maturity date in advance. If you choose not to renew, you can close the certificate and withdraw your funds, and put the funds in another account or open a different certificate. Early redemption can incur penalties, be sure to check the terms of your certificate, because some renew automatically when the certificate holder doesn't take action. 

Should you open a certificate? 

You should open a certificate if you are trying to save money and you want to grow your savings responsibly and safely. Unlike with a savings account, it's difficult to withdraw funds from a certificate if you need them later. Assess your financial state and determine whether you can afford to remove the certificate amount from your budget before opening a certificate. Opening a certificate account can be a great way to rein in unnecessary spending. 

Certificates and your credit score

On their own, certificates have neither a positive nor a negative effect on your credit score. You can take out a loan and use your certificate as collateral. Some financial institutions allow their customers to take out loans that are worth 95% of the certificate's value. Because certificates are low-risk instruments, financial institutions usually approve the secured loan because they can easily access the collateral without going through collections agencies. As long as you make the monthly loan payments, you can build your credit score. Defaulting on the loan will not only liquidate your certificate but also lower your credit rating. 

If you're ready to save with a certificate, Alliant offers several convenient ways for  you to open a regular or jumbo certificate. If you're already an Alliant member, just log in to online banking and select Open a New Account in the left sidebar and follow the prompts. If you're not yet a member, review our Certificates page for steps on how to apply.

Need more information about certificates? Check out these articles:

* Your deposits are federally insured up to $250,000 and backed by the full faith and credit of the United States Government.

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