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The difference between a share certificate and a certificate of deposit

A man checks his certificate of deposit from his phone.
February 25, 2019

By Katie Pins

A certificate of deposit from a bank or a share certificate from a credit union is a great way to reach your financial goals quicker. It’s a low-risk investment with a higher APY than even a high-rate savings account. Here is everything you need to know to make a certificate work for you.

What is a certificate of deposit?

A certificate of deposit (CD) is a type of savings account that pays a set dividend on a fixed amount of money for a specified period of time, or term, which ends on the maturity date. Terms may run from a month to five years or more. When you open a certificate of deposit, you agree to leave your money in the account for the full term, or face penalties for early withdrawal. Shorter maturities generally earn a lower rate of interest than those with longer terms. Certificates of deposit are insured for up to $250,000 by the Federal Deposit Insurance Corporation (FDIC).

Note: While most CDs offer a fixed dividend for the entire term, some have variable rates that may be determined by a market index such as the prime rate, the consumer price index or yields on U.S. Treasury securities.

How do certificates of deposit work?

Let’s break down how CDs work and look at an example. Your goal is to go on the vacation of your dreams, but you want some extra help getting there. The stock market is volatile and you want to ensure you don’t lose any money while you’re saving for this trip. You plan on booking that trip two years from now, so you decide a 24-month CD is a good option because it will give you a higher rate than your savings account.

You have $3,000 to put away and the rate on the 24-month CD is 2.70% APY. You want to make the most of your money, so you choose to keep your monthly interest payments in the certificate. You cannot access this money for two years without an early withdrawal penalty. So, it’s important that you have an emergency fund for those unexpected expenses that may pop up.

At the end of the two years, you’ll have $3,164.19. That’s an extra night’s stay!

What is the difference between a CD and a share certificate?

Alliant offers share certificates, not CDs. So, a common question we get is, “what’s the difference?” The short answer is, not much. A share certificate (or simply, certificate) at a credit union provides the same benefit to the customer as a certificate of deposit at a bank. Since credit union members are the owners of the credit union, they have shares of the credit union – hence, the term “share certificate”. Thus, credit unions pay “dividends” on the certificates instead of “interest” that banks pay on their CDs. However, they are essentially the same in purpose and both pay a fixed amount of money for a specific term. Certificates are insured for the same amount as banks, up to $250,000, but by a different institution, the National Credit Union Administration (NCUA).

You could get all the benefits of a certificate of deposit from an Alliant Credit Union Certificate. You may get a better rate from a certificate than from a CD because, unlike banks, credit unions return their profits to their members.

Why invest in a certificate?

If you’ve got cash you can comfortably lock up for a while, certificates could provide higher interest rates than regular savings accounts. Plus, the principal is safe, thanks to that NCUA insurance. If you were to put that cash in stocks or bonds, you could lose some or all of your initial investment.

Returns on stocks and bonds typically outpace certificate rates in the long run; however, certificates have a much lower risk and can help you earn more on your money. Also, your earnings won’t be eroded by fees, as may be the case with other types of investments such as mutual funds or money market accounts. Finally, the range of maturity terms in a certificate gives you the flexibility to choose certificates that provide access to your money when you expect to need it.

In short, fixed-dividend certificates, like the ones offered at Alliant, offer security during uncertain economic times. No matter what happens in the market, your investment will continue to earn the rate of return you locked in at the outset.

Who should buy certificates?

Because you choose certificates with terms that suit your needs, they can work well for investors at almost all ages and stages of life:

  • Parents and grandparents might want to begin investing in certificates for higher education 10 to 15 years before a child is expected to begin college.
  • Young professionals can invest in certificates for a few years to help save for a down payment on their first home or to pay for a wedding.
  • Middle age is the perfect time to use certificates to build a retirement fund.
  • At any age, certificates can help save money for a special occasion, like a vacation or home improvement project.

By staggering or laddering certificates, an investor can get long-term rates of return while preserving the ability to capture the benefit of increases over time. Rather than purchasing a single large certificate, break the sum you have to invest into five parts and put equal portions into a one-year, a two-year, a three-year, a four-year and a five-year certificate. When the one-year certificate matures, take the money and reinvest it in a five-year certificate. Do that again as each certificate matures and after five years, you’ll have five certificates that yield long-term dividends yet mature each year. In addition to helping you save for your goals, a certificate ladder with staggered maturities also gives you the option at the end of each term to use the money for emergencies -- an unexpected job loss, illness or accident, for instance.

 

A certificate or CD can help you get to your savings goal quicker than many other accounts. If you want more flexibility, check out three types of accounts for smart savers or get inspired with passive income opportunities so you can earn more.


Katie Pins is a marketer fascinated with finance. Whether the topic is about the psychology of money, investment strategies or simply how to spend better, Katie enjoys diving in and sharing all the details with family, friends and Money Mentor readers. Money management needs to be simplified and Katie hopes she accomplishes that for our readers. The saying goes, "Knowledge is Power", and she hopes you feel empowered after reading Money Mentor.