What is a Term Certificate and Should You Consider It?

Too nervous about investing, but not happy about the low rate of return in your standard savings account? There is a middle ground between the risks and possibly higher returns of investing, and the generally safe but low returns of standard savings accounts.

It’s called a term certificate and with national interest rates rising, it’s finding its way into the financial plans of people from all walks of life — from young adults saving up for a car or house down payment, to retirees and near-retirees wanting to dial down their retirement savings risk.

What is a Term Certificate?

A term certificate is a savings option that lets you grow your money at a fixed rate for a set period of time. You deposit a set amount of money for a specific “term” — like six months, 12 months, or even longer. In return, you earn a guaranteed dividend rate that won’t change during that time. When the term ends (that’s called the maturity date), you can withdraw your money plus the dividends you’ve earned, or roll it into a new certificate.

Here’s what you need to know about varying terminology:

Term Certificate vs CD

A term certificate (also sometimes called a “share certificate”) is the credit union version of a for-profit bank’s certificate of deposit (aka “CD”). The reason for the different titles is because credit unions don’t pay “interest” — they return earnings to their member-owners in the form of dividends. The word “term” highlights what makes this account special: you commit your savings for a specific period of time in exchange for a guaranteed rate. It’s different from a standard account like checking or savings where you can deposit and withdraw funds anytime.

How Term Certificates Work

Most financial institutions offer certificates for terms ranging from three months to five years, but sometimes you’ll find terms as short as one month and as long as ten years.

When the term is up, the certificate “matures” and you have three choices:

• Let it automatically renew for the same or similar term at the current rate
• Put the money into a new certificate at a different term or rate
• Cash it out and take your initial deposit amount plus dividends you’ve earned

Pros and Cons of a Term Certificate

There are a few things to know about term certificates before you dive in. And, while term certificates aren’t for everyone, there are a few advantages in the right financial circumstances. Pros include:

• You’ll earn more than a standard savings account. Because you agree to keep your money in the certificate for a specific period of time, the financial institution generally will pay a higher rate than you’d earn on their standard account — often, a lot more. That’s especially true of BluPeak Credit Union certificates, since they return the money they make to members in the form of better rates.
• Your rate of return is guaranteed. When you open a certificate, the financial institution makes a promise upfront to pay you a specific rate through maturity.
• Your money is safe. As long as you don’t withdraw your money before the certificate matures and stay under the NCUA’s federal deposit insurance coverage limits your accounts are safe and guaranteed against loss of principal.
• You won’t pay monthly maintenance fees. Many standard accounts come with monthly maintenance fees if you don’t meet certain minimum requirements, but that’s generally not the case with term certificates. With no fees, you get to keep all of your earnings!

However, there are some cons:

• Your money is less accessible. Because term certificates are designed to be held until maturity, your funds aren’t as liquid as they would be in a checking or savings account. If you think you may need quick access to your money, a certificate may not be the best fit.
• Early withdrawals usually come with a penalty. If you need to take your money out before the term ends, you’ll typically pay an early withdrawal penalty. While this penalty is often limited to a portion of the dividends earned, it can reduce (or in some cases eliminate) your overall return.
• You could miss out if rates rise. Once your rate is locked in, it stays the same for the entire term. If market interest rates increase after you open your certificate, your money will continue earning the original rate until maturity.
• Minimum deposits may be required. Some term certificates require a higher opening balance than standard savings accounts, which can be a barrier if you’re just getting started.

Best Practices for Term Certificates

Once you’ve established an emergency fund of readily available cash that’ll be used to cover unexpected expenses, you’re probably in a position to consider a term certificate. Here are some tips to consider:

• Think of it as enforced saving. This is a scenario when playing mind-games with yourself can be productive! By keeping your money in a certificate, you may be less tempted to “borrow” from yourself than you would if the money was in a standard savings account that allows penalty-free withdrawals.
• Longer is better…except when it’s not. Usually, you’ll earn more on a longer term certificate but that’s not always the case. It’s always important to check rates and make a thoughtful decision about when you’ll need the money, how long you can realistically do without it, and then choose your term accordingly.
• Use certificates for mid-term financial goals. Say you’re in your 20s now. When you’re looking down the road toward retirement, most experts recommend diversified investing in stocks and bonds because they’ve historically been the best options over the long term. However, for high-cost mid-term goals like saving up for educational expenses, a car or house down payment, or maybe a trip-of-a-lifetime, the higher rates of return on term certificates compared to standard savings accounts can be a great fit.
• Use certificates to diversify. If you’re in or nearing retirement, term certificates can be a great option to increase the diversification of your portfolio. Not exactly savings and not an investment, they can bring peace of mind during stock and bond market fluctuations.

How to Get a Term Certificate

Opening a term certificate is just as simple as opening any other savings account. At BluPeak, you can visit the account opening page to get started.

In BluPeak’s case, there’s a minimum balance requirement of $500, and you can have multiple certificates. In fact, lots of people employ a strategy called a “certificate ladder” that involves opening multiple certificates, maturing in sequence, so they always have the option to either access a portion of their money or roll it into another certificate.

Frequently Asked Questions

What is a term certificate?

A term certificate is a savings account that allows you to deposit money for a fixed period (during which the funds are generally not accessible). In return, you earn a higher interest rate compared to regular savings accounts, and the investment is federally insured by the NCUA for up to $250,000, making them a low-risk option for building wealth.

Can I withdraw money early from a term certificate?

At most financial institutions, you can usually withdraw money early from a term certificate, but there is often a penalty to withdraw a term certificate prior to its maturity date. At BluPeak, if you withdraw funds from your term certificate with an original term of less than one year, it’ll result in forfeiting 90 days’ worth of dividends. If you withdraw funds from your term certificate with an original term of one year or more, it’ll result in forfeiting 180 days’ worth of dividends.

Do financial institutions notify you when a term certificate has matured?

Yes, you should receive a notification prior to your term certificate’s maturity date. From there, you’ll be given the option to renew your term withdraw funds and dividends.