CDs vs. share certificates: What’s the difference?

Both are low-risk options for saving money

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CDs and share certificates are deposit accounts that allow you to deposit your money for a set time and earn a fixed interest rate in return.

Because you’re promising to keep your money on deposit with the bank or credit union for a set period, CDs and share certificates earn higher returns than savings accounts. However, the downside is that your money is locked up until the term expires. If you want to access your funds early, you’ll usually need to pay an early withdrawal fee.

These two account types function nearly identically. The main difference is that you open a CD at a bank and a share certificate at a credit union.


Key insights

  • CDs and share certificates are safe savings accounts with a fixed interest rate for a set period.
  • While you’ll earn a relatively high rate of return on these deposit accounts, you’ll likely need to pay an early withdrawal penalty to access your funds before the term ends.
  • The key difference between CDs and share certificates is that you get CDs from a bank and share certificates from a credit union.

What is a certificate of deposit (CD)?

A certificate of deposit (CD) is a type of bank account that allows you to save money at a fixed interest rate for a set period. You’ll typically earn a higher interest rate with a longer term. For example, you might earn a 4% annual percentage yield (APY) on a six-month CD and a 4.75% APY on a one-year CD.

CD terms commonly range from as short as one month to as long as five years. Once you deposit funds into your CD, you can’t access them without penalty until the term ends. If you need to take the funds out early, you’ll usually incur an early withdrawal penalty equaling a fraction of the foregone interest. For example, if you withdraw funds three months before the term expires, you’ll incur a fraction of three months' interest.

CD returns are set at a fixed interest rate the bank pays on your deposits. Returns are not tied to an index like the stock market, making CDs a relatively safe investment.

If you want to earn a relatively high rate of return on a safe investment over a short to medium term, a CD can be a good option. You can easily predict your earnings, since the interest rate is fixed. Plus, CDs with Federal Deposit Insurance Corporation-insured banks are backed by a government guarantee.

» MORE: Are CDs worth it? How much money should you put in a CD?

What is a credit union share certificate?

Share certificates allow you to earn a relatively high fixed interest rate on your money in exchange for agreeing to keep the funds on deposit with a credit union for a specified term. In essence, share certificates work just like CDs. The only difference is you’re working with a credit union instead of a bank.

As with CDs, returns for share certificates are tied to the fixed interest rate the credit union pays on your deposits, rather than an index like the stock market.

Also similar to CDs held with FDIC-insured banks, a government guarantee backs share certificates held with National Credit Union Administration-insured credit unions. This deposit insurance provides an additional layer of safety and protection to the funds in your account.

» MORE: Is a CD investment safe?

Pros and cons of CDs and share certificates

Regardless of whether you choose a CD or share certificate, the pros and cons are the same. That’s because the main difference between CDs and share certificates is you’ll hold a CD at a bank and a share certificate at a credit union.

The pros and cons of CDs and share certificates are:

Pros:

  • Interest rates are typically higher than with traditional savings accounts.
  • Your interest rate is fixed for the entire term, making interest earnings predictable.
  • CDs and share certificates are safer than many other types of investments.

Cons:

  • You’ll likely face an early withdrawal penalty if you take funds out early.
  • You might be locked into a lower-than-market rate if interest rates increase.
  • You usually can’t add funds to the account after you initially fund it.

How to choose between CDs and share certificates

Since CDs and share certificates are similar products, you’ll first need to decide if you prefer using a bank or a credit union. Remember to consider banks' and credit unions’ motivations and how they operate.

Matthew Benson, a certified financial planner and owner of Sonmore Financial in Chandler, Arizona, explained: “A bank is owned by an investor or group of investors whose objective is to make a profit. A credit union is owned by its members and has no profit motive. Its motive is to serve its members.”

When you become a credit union member, you get a fractional ownership interest in the financial institution. Because credit unions are owned by their members, the profits they earn are returned to the members in the form of perks like lower fees and higher savings rates — a factor that might impact your decision.

“The biggest difference should come down to the ease of doing business with the bank or credit union and what the CD or share certificate pays,” Benson said.

As you’re choosing between a CD or share certificate, compare rates and consider how easy it is to open the account and conduct business.

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FAQ

Are credit unions safe?

Credit unions are just as safe as banks, as government deposit insurance is available with both financial institutions. The FDIC insures banks, protecting up to $250,000 in deposits for each account holder, and the NCUA similarly insures accounts at credit unions.

Banks and credit unions are legally required to disclose if they are FDIC- or NCUA-insured.

How do you open a CD or share certificate?

Before opening a CD or share certificate, research the rates and terms you can get at various financial institutions, and choose the one that best fits your needs. You’ll then submit an application to the bank or credit union and select the CD or share certificate rate and term you want.

After your CD or share certificate account is open, you’ll fund it electronically or by depositing money using a check or cash.

How much can you earn with a CD or share certificate?

The interest you can earn with a CD or share certificate depends on the rate and term. You’ll generally earn a higher interest rate on a longer-term CD or share certificate. As an example, if you hold $2,500 in a one-year CD or share certificate with interest compounding monthly, you would earn $128 at a 5% interest rate, versus $102 at a 4% interest rate.

Are CDs and share certificates FDIC-insured?

When you open a CD with an FDIC-insured bank, your deposits with the bank are insured by FDIC. Share certificates work the same as CDs but are opened at a credit union. Share certificates at an NCUA-insured credit union are insured by the NCUA.

Bottom line

If you want to store your money in a safe location, earn a relatively high interest rate and easily predict your interest earnings, CDs and share certificates are good options. However, before opening an account, consider your savings goals.

Once you’ve opened a CD or share certificate, you usually won’t be able to access your funds before the term ends without paying an early withdrawal fee. This can be problematic if you need to access your funds to pay for an emergency. So, it’s best to build a separate emergency fund in an easily accessible savings account.

Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Federal Deposit Insurance Corporation, " Your Insured Deposits ." Accessed Feb. 2, 2023.
  2. National Credit Union Administration, " About Credit Unions ." Accessed Feb. 2, 2023.
  3. National Credit Union Administration, “ Share Insurance .” Accessed Feb. 2, 2023.
  4. National Credit Union Administration, " Deposits Are Safe in Federally Insured Credit Unions ." Accessed Feb. 2, 2023.
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