Share Certificate vs. CD: What’s the Difference?

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Share certificates and certificates of deposit (CDs) are insured, low-risk investments that typically offer higher yields than regular savings accounts. While they work similarly, the key difference comes down to where you open them — a credit union or a bank. Here’s how they compare.

Share Certificate vs. CD: At a Glance

What Is a CD?

CDs are a type of savings account that pays interest for a specific term length. After the term ends, the CD matures and the money is returned to you. They are FDIC-insured up to $250,000.

How CDs Work

• Make a deposit. You make a deposit as a lump sum for a set term. 
• Bank pays a fixed interest. The bank will have different APYs for certain terms. 
• You cannot withdraw funds early. Unless it is a no-penalty CD, you cannot withdraw early from your account. 
• Wait until your CD matures. When the CD matures, you can withdraw your money, roll the funds into a new CD or let it automatically renew.

Interest

CD rates are typically higher than that of regular savings accounts, especially for longer terms. Fixed-rate CDs offer predictable earnings.

Types

Although CDs share the same basic structure, there are a variety of CDs that you can purchase. Here are some of the main CD variations:

• Traditional CD: Traditional CDs are what most investors consider “normal” or “ordinary” CDs. They typically have fixed interest rates and set terms.
• Jumbo CD: Jumbo CDs operate like traditional CDs but have higher minimum balance requirements, typically $100,000 and they may carry higher APYs.
• Liquid or no-penalty CD: Unlike most traditional CDs, liquid or no-penalty CDs allow for distributions without early withdrawal charges.
• Step-up and bump-up CD: These CDs allow for an increase in the rate paid on the CD if current market rates are higher. This is typically allowed only once during the life of the CD.
• Callable CD: A callable CD gives the issuer the option to redeem the CD at a specified date and price before maturity. If market interest rates fall dramatically, for example, the issuer may choose to redeem its high-rate CDs so it could issue new ones at a lower rate. In exchange for this uncertainty, a callable CD may offer a higher initial interest rate.
• Add-on CD: An add-on CD allows the owner to make additional investments according to the original terms of the CD.
• Special, bonus or promotional CD: Individual banks will frequently offer promotional CD rates or special terms for specific maturities. These promotions can come or go at any time.

What Is a Share Certificate?

Share certificates are essentially identical to their much better-known kin, CDs. The primary difference is that while CDs are offered by banks, share certificates are offered by credit unions. Otherwise, these two types of investments function in the same way, paying interest to investors and returning principal at maturity, all the while offering government insurance.

How Share Certificates Work

• Deposit money. You deposit a sum of money into a credit union for a specific term.
• You receive dividends. The credit union will give you dividends. 
• Withdraw at maturity. At the end of the term, you can withdraw your funds plus the amount of dividends accrued. 

Dividends

Dividends are the equivalent of interest on a CD. Dividends are paid regularly, either monthly or quarterly, and may be compounded. Dividend rates may be higher than interest rates for CDs. 

Credit Union Membership Requirements

To be eligible to buy a share certificate, you must be a member of a credit union. Credit union membership depends on where you work, live or worship. Many credit unions offer an easy path to membership. 

Share Certificate vs. CD: Key Similarities

CDs and share certificates are nearly identical in how they function and what they provide to customers. Here’s where they’re most similar:

Fixed Terms and Interest Rates

At most banks, credit unions and other financial institutions, you can open both a standard CD or a share certificate with a fixed rate of interest. This guarantees a return on your investment at the end of the term.

Not only does the interest accrue on your principal, it also compounds, leading to even more savings on the money that’s sitting in an account. 

Early Withdrawal Penalties

You are always free to withdraw the money from a CD or a share certificate. However, if you do this before the CD term ends, it’s considered an early withdrawal.

With that penalty, there may be a fee to pay, including losing out on some of the interest you’ve earned. Thus, you also reduce some of the money that you may have saved during the term.

FDIC and NCUA Insurance

If your bank is a member of the FDIC or your credit union is backed by the NCUA, your money is insured by the government if the bank or institution fails. You would be covered up to $250,000 for each account, for each deposit account type.

Share Certificate vs. CD: Key Differences

Although share certificates and CDs operate quite similarly, there can be some subtle differences between the two. Here are some of the primary ones.

Bank Account vs. Credit Union Membership

Credit unions issue share certificates, while banks offer CDs. Some credit unions may offer third-party CDs in the secondary market, but they aren’t the primary issuers.

Since credit unions are not-for-profit entities owned by their members, they may offer more specialized share certificates to meet customer needs and can sometimes pay higher yields.

Banks have also gotten more flexible with their CD lineups, and many of the distinctions between the two have narrowed.

Interest Rate Differences

At one time, it was common for share certificates to offer slightly higher yields than CDs. The banking industry has become so competitive that this is no longer the case.

Some local credit unions may offer special CD rates to customers, but you can likely find competitive or even superior CD yields by shopping around at various banks, particularly those that operate online.

Maturity Terms and Flexibility

Generally speaking, CDs offer a greater range of maturity terms and flexibility. This is because credit unions typically have more limited product offerings than banks, due to their size and not-for-profit mandate.

Credit unions can be competitive with CDs, in terms of flexibility and yields, but you’re more likely to find 10 or more maturity dates with a bank’s CD offerings, for example.

When To Choose a CD vs. Share Certificate

Other Ways To Grow Your Money

You can consider a high-yield savings account, money market account or treasury bills if you don’t want to invest in a CD or share certificate. 

• High-yield savings account: This account offers easy access to funds — you won’t be penalized for withdrawing. Minimum deposits are usually lower than a CD, and APYs can range from 3.80% to 4.50%.
• Money market account: A money market account offers more liquidity than a CD. The rates are generally variable and not fixed. Minimum balances are usually more than a CD — $1,000 to $5,000.
• Treasury bills: T-bills offer a conservative way for individuals to invest. They are backed by the government and are insured. This account often requires a $100 minimum deposit, which is lower than a CD. T-bills are exempt from state and local taxes. 

Final Takeaway

Here’s what to remember when weighing CDs vs. share certificates:

• CDs and share certificates work similarly, but are issued by two different institutions. CDs are issued by banks, while share certificates are issued by credit unions.
• Both CDs and share certificates are insured. CDs are insured by the FDIC, while share certificates are insured by the NCUA. 
• CDs don’t require a membership to purchase, while a share certificate requires membership to a credit union. 
• Choosing a CD over a share certificate is based on what is convenient for you. If you prefer accessibility and robust bank tools, you should opt for a CD. If you are a member of a credit union or eligible for membership, opt for a share certificate. 

Melanie Grafil and John Csiszar contributed to the reporting for this article.

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