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When you're just starting to think about growing your savings, the world of finance can feel a bit overwhelming. With so many options out there, how do you choose the right one for your needs? If you've been exploring ways to earn higher returns without taking on too much risk, you've probably come across two popular terms: certificates of deposit (CDs) and term certificates. But what exactly are they, and how do they differ?
In this guide, we'll break down what a term certificate is, how it compares to a CD, and whether it's a good fit for your savings goals. Whether you're in your 20s or 40s and looking for a safe way to grow your money, we've got you covered.
What Is a Term Certificate Account?
A term certificate—also known as a share certificate—is a fixed-term, dividend-bearing deposit account offered by credit unions. Essentially, you're agreeing to lock up your money for a specific period, typically ranging from a few months to several years, in exchange for a guaranteed return at a fixed dividend rate.
Term certificates are essentially a credit union's version of a certificate of deposit (CD) account at a bank, with the main difference being the institution offering the account. But there are also some differences in benefits. Credit unions often offer higher dividend rates on term certificates because of their not for profit structure, and deposits are insured (up to $250,000) by the NCUA instead of the FDIC.
How Does a Term Certificate Work?
Term certificates are pretty straightforward, the basics being:
They have fixed terms: You'll choose a term length—typically 6 months, 1 year, 3 years, or 5 years.
They have “maturity” dates. At the end of your term, your deposit “matures.” You'll get back your original deposit plus the dividends earned. At that point, you can either cash out, roll it over into a new Term Certificate, or transfer the money elsewhere.
They earn dividends. This is essentially the same as “interest” at a bank, and the rate you earn is fixed for the entire term, which means you don't need to worry about fluctuations in the market. A general rule of thumb is that the longer the term of the certificate, the better the rate. However, economic conditions can influence this pattern. For example, financial institutions may offer slightly higher rates on mid-term certificates than on long-term ones, as they anticipate future rate cuts.
There are usually penalties for withdrawing funds early. One important consideration is that if you withdraw your money before the term ends, you may face a penalty. This is one of the trade-offs for getting guaranteed returns—your money is tied up for a set period, so you have to make sure this is aligned with your financial goals and responsibilities.
Types of Term Certificates
Term certificates come in a few different varieties, each with its own features. Here's a breakdown:
Traditional Term Certificates: These are straightforward fixed-term accounts where you commit your funds for a set period, earning a guaranteed dividend rate. At Sunward, traditional term certificates are available with terms ranging from 3-60 months, starting at a minimum deposit of $500.
Bump-Up Term Certificates: Some term certificates offer a bump-up feature, allowing you to increase your dividend rate during the term if market rates rise.
Step-Up Term Certificates: These certificates increase your rate at set intervals, typically over the term of the account. This provides similar flexibility to bump-up certificates.
No-Penalty Term Certificates: With these, you can withdraw all or a portion of your funds before the term ends without facing a penalty, offering added flexibility. For example, Sunward offers a 16-month FLEX Account that allows you to withdraw up to 50% of your balance once per month without incurring a penalty.
Jumbo Term Certificates: Jumbo term certificates typically require larger deposits (often $100,000 or more) and usually offer higher rates.
Brokered Term Certificates: These are purchased through brokers and usually involve larger deposits and potentially higher rates, though broker fees may apply.
Pros and Cons of Term Certificates
Like any financial product, term certificates come with their own set of pros and cons. Here's a quick rundown:
Pros
Predictable Returns: You know exactly what your returns will be, which makes budgeting and planning easier.
Low Risk: Term certificates are one of the safest ways to grow your savings because they're backed up to $250,000 by NCUA insurance (or FDIC insurance, for a CD at a bank).
Guaranteed Dividends: Your dividend rate is locked in for the entire term, so you won't be affected by market fluctuations.
Higher Dividend Rate: Because you're agreeing to leave your money in the account for a longer, fixed period, term certificates usually earn you a better rate than other savings accounts, like high-yield savings or money market accounts.
Cons
Limited Liquidity: Your money is tied up for a set period, which could become an issue if you need access to your funds for any reason.
Inflation Risk: If inflation rises quickly, the dividend rate on your term certificate might not keep pace with the rising cost of living.
Opportunity Cost: You might miss out on better returns if rates rise during your term.
When Does a Term Certificate Make Sense?
Term certificates are best suited for those who are looking for safe, predictable growth and are willing to lock up their money for a set period. Here are some ideal scenarios for using term certificates:
Short-Term Saving: If you're saving for something specific within the next few years, like a down payment on a home or a big purchase, a term certificate offers a safe way to grow your money without worrying about market fluctuations.
Guaranteed Saving: Term certificates are a great option if you want to “force” yourself to save. Because your money is locked in for the duration of the term, it reduces the temptation to dip into your savings, making it an effective tool for those who need a little extra discipline in managing their funds.
Conservative Portfolios: If you have a more conservative approach to investing and prefer guaranteed returns, a term certificate can be an excellent addition to your portfolio.
However, if you're someone who needs access to your funds at any time — or if you're less risk-averse and would prefer to invest your cash into vehicles like stocks and bonds that offer higher risk but potentially higher reward — you may want to consider other options.
How to Open a Term Certificate Account
Opening a term certificate is straightforward. Here's what you'll typically need to do:
Choose Your Credit Union: Whether you open your term certificate with a local credit union or an online option, do your research to ensure that you're happy with the term certificate offering before moving forward.
Choose Your Term and Rate: Decide how long you want to lock in your money and the dividend rate you're comfortable with.
Compare Terms and Penalties: Make sure you understand the early withdrawal penalties and other terms before you commit.
Deposit Your Funds: Once you've chosen your term certificate, deposit the funds and start earning dividends.
Term Certificates: What to Know in 2025
As we move through 2025, there are several trends shaping how people think about savings — and whether term certificates feel like a good option in their toolbox.
Rate Trends
For one thing, rates remain a key topic for savers considering term certificates. The Federal Reserve's actions in the coming months are likely to have a significant impact on rates, and understanding this dynamic is essential for making informed decisions.
Historically, CD and term certificate rates move in tandem with the federal funds rate. When the Fed lowers its benchmark rate, banks often adjust their deposit product rates accordingly.
According to Bankrate, the average annual percentage yields (APYs) for different CD terms, as of August 2025, are between 1.69% and 2.01%, with 1-year CDs offering the highest average rate at 2.01%, followed by 5-year CDs at 1.71% and 3-year CDs at 1.69%. However, if the Fed implements rate cuts — something which is widely expected to happen in the coming months due to weaker-than-expected jobs data and ongoing inflation concerns, according to Reuters — these rates are likely to decrease, especially for longer-term products.
Term Certificate Laddering and Inflation-Hedging
In an environment where inflation concerns persist, “laddering” offers a strategic approach to safeguard your purchasing power. This method involves dividing your investment across multiple term certificates with varying maturity dates. As each certificate matures, you can reinvest the principal into a new one, potentially at a higher rate, thereby staying ahead of inflation. It's a smart way to balance the benefits of higher rates with the flexibility of accessing your funds at regular intervals, all while mitigating the impact of inflation on your savings.
And, in general, financial experts have often seen long-term CDs and term certificates as smart savings vehicles during periods when inflation is a concern — especially when you can secure rates above the long-term inflation average. Historical data indicates that CDs yielding 3% or more have often helped preserve purchasing power over time.
Gen Z and Term Certificates
Generation Z is notably more proactive about retirement than previous generations at the same age. A Northwestern Mutual study found that Gen Zers began saving at an average age of 24 and aim to retire by 61, with 63% feeling confident that they'll be prepared for retirement when the time comes.
That said, they're approach to saving tends to focus on higher-risk investments that can promise higher rewards. According to data from Nasdaq, only 6% of Gen Z savers put their money in CDs or certificates of deposit, instead favoring vehicles like stocks. However, financial experts note that younger generations would be smart to reconsider, since the guaranteed returns on a term certificate or CD might be smarter in the long run than fluctuating market returns.
Smarter Saving: Growing with Term Certificates
As you explore ways to grow your savings, term certificates offer a reliable and low-risk option to achieve your financial goals. Whether you're saving for a specific purchase or looking for stable, guaranteed returns, term certificates offer predictability, stability, and inflation-hedging benefits, making them a valuable addition to any portfolio — especially in uncertain economic times.
Ready to start growing your savings? Explore Sunward's range of term certificates and other savings vehicles. With competitive rates and flexible options, Sunward offers a variety of products to help you secure your financial future.
FAQs
Are term certificate accounts safe?
Yes, term certificates are very safe. They are insured up to $250,000 by the NCUA (for credit unions) or the FDIC (for banks), making them low-risk investments backed by the government.
Can you lose money in a term certificate?
You generally cannot lose money in a term certificate, as the principal is guaranteed. However, if you withdraw your funds early, you may face an early withdrawal penalty, which could reduce the dividends earned or, in some cases, take back some of the principal.
Can you withdraw money early?
Yes, but there are penalties for early withdrawal. The penalties vary by institution and term length but often involve losing a portion of the dividends earned. Some products, like Sunward's FLEX Account, allow partial withdrawals without penalties under certain conditions.
What happens when a term certificate matures?
When a term certificate matures, you receive your original deposit plus the dividends earned. You can choose to cash out, roll it over into a new term certificate, or transfer the funds elsewhere, depending on your financial goals.
How are dividends paid on a term certificate?
Term certificates earn dividends (equivalent to interest), which are paid at the end of the term or periodically, depending on the terms set by the financial institution. Some pay monthly or quarterly dividends, while others pay the dividends as a lump sum at maturity.
