What is a share account at a credit union

In order to become a member Shares must be purchased. A Share account is the account which generates dividends and is held as collateral for a loan. The deposit account can be used as a current account to conduct ordinary transactions. This account does not generate any dividends.

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A share draft is a type of draft, which credit unions use, as a way to access funds in individual accounts. Share draft accounts at credit unions are the equivalent of personal checking accounts at standard banks. However, these shares represent partial ownership in a credit union, and credit union members (shareholders) write drafts (checks) as a way to access the value of their partial ownership (shares). While it might not affect how you use the account, share draft accounts are a form of ownership. This means you are a partial owner of the credit union while checking account owners are customers of banks."

Key Takeaways

• Share drafts are accounts at credit unions are akin to checking accounts at banks.
• Because credit unions are cooperatively owned, members do not make deposits, but rather purchase shares.
• Shares do not earn interest, but instead, earn dividends.
• Share draft accounts usually carry neither monthly fees nor minimum balance requirements,

How Share Drafts Work

Credit unions function differently than banks. In a credit union, every member is also a partial owner. Because credit unions are cooperatively owned, members do not make deposits, but rather purchase shares. Shares do not earn interest, but instead, earn dividends. (A dividend is a distribution of a portion of an organization's earnings, decided by the board of directors or other managerial entity, paid to a class of its shareholders.)

What's more, share draft accounts usually carry neither monthly fees nor minimum balance requirements, unlike many bank checking accounts. In traditional commercial banking, service charges help generate income from accounts that don't bring in enough interest revenue to cover the bank's expenses.

Charging fees when customers fail to maintain a minimum balance (i.e., overdraw an account or write too many checks) ensures that these accounts continue to make financial sense for the institution.

Special Considerations

Credit unions first originated in 1844 in Rochdale, England, when a group of weavers established the Rochdale Society of Equitable Pioneers. This organization raised the capital to buy goods at discount prices, subsequently passing the savings along to their members.

Many consider Friederich W. Raiffeisen to be the founder of the modern credit union. He established the Heddesdorf credit union in Germany in 1846. In 1901 credit unions were introduced in Canada and arrived in the United States in 1908. The St. Mary's Bank Credit Union in Manchester, New Hampshire, was the first credit union in the U.S.

Originally, membership in a credit union was limited to people who shared a "common bond." For example, they had to work in the same industry or for the same company. Members might all live in the same community.

Today, however, credit unions have loosened membership restrictions, allowing the general public to join. At times traditional retail banks have felt the pressure of competition from credit unions.

A share-draft account is a version of a checking account, except it is offered by a credit union instead of a bank. In order to understand what a share-draft account is, it is first important to know the difference between a bank and a credit union.

Banks are businesses that exist to make a profit from offering financial products, such as loans, savings and checking accounts, certificates of deposit (CDs), and credit cards, to consumers. Credit unions are financial institutions that are owned jointly by all members or account holders. They do not exist to make a profit but rather to benefit the account holders. When you deposit money into a credit union share-draft account, you're technically buying shares in that credit union.

Key Takeaways

• A share-draft account is a credit union account that is similar to a bank's checking account, except it is equivalent to buying a share in the credit union.
• Share-draft accounts do not have minimum balance requirements or charge account maintenance fees. They also earn interest, compounded on a quarterly basis.
• Share-draft accounts were created under the Consumer Checking Account Equity Act of 1979.
• Share-draft accounts are insured by the National Credit Union Administration (NCUA), come with bank cards to withdraw money from ATMs and make point-of-sale (POS) purchases, and checkbooks to write checks for any payment.

Understanding a Share-Draft Account

A share-draft account refers to a credit union account that is similar to a bank's checking account. Share-draft accounts were created under the Consumer Checking Account Equity Act of 1979.

Share-draft accounts allow credit union members to access their share balances by writing drafts on their accounts. Share-draft accounts allow for an unlimited number of checks to be written, and one of their primary benefits is that they are secured with federal insurance by the National Credit Union Administration (NCUA).

Insurance for bank deposits is provided by the Federal Deposit Insurance Corporation (FDIC). Both NCUA and FDIC deposits are ensured for up to $250,00 per individual. Bank deposits are insured to prevent bank runs in the event that a bank fails.

Interest earned on share-draft accounts is compounded quarterly. These accounts are similar to negotiable order of withdrawal (NOW) accounts, which are basically interest-bearing savings accounts against which drafts can be written. However, share-draft accounts are offered by credit unions, whereas NOW accounts are bank products.

In practice, a share-draft account operates almost exactly like a checking account. Account holders can write unlimited checks against the account, and credit unions typically issue debit cards that can be used to make purchases and withdrawals using the shares in the accounts.

Account holders can use their debit cards to make point-of-sale (POS) purchases, withdraw money from ATMs, or shop online. Account holders can also go into a credit union branch to deposit or withdraw money from a share-draft account.

Share-Draft Accounts vs. Checking Accounts

A key difference between share-draft accounts and many checking accounts is that the former earns interest. Credit unions pay interest and dividends on shares held by account holders, so the money deposited into a credit union earns dividends and interest that is compounded quarterly.

Between 1933 and 2011 in the U.S., demand deposit checking accounts were not allowed to earn interest. Now that the prohibition on demand deposit interest has been lifted, some bank checking accounts offer interest. Conversely, bank checking accounts often come with savings accounts associated with them, almost as one account, where deposits can earn interest.

Another key difference between share-draft accounts and checking accounts is that many banks require a monthly minimum balance or charge monthly fees for the maintenance of a checking account.

Credit unions do not charge their members any monthly fees or require minimum balances in share-draft accounts, or at the most, low fees. This makes them an attractive option for consumers looking to avoid paying fees or having to maintain minimum balances, especially now that many credit unions have opened their doors to the general public.

Overall, credit unions provide many benefits over banks, seen through better interest rates on deposit and savings accounts, mortgages, and certificates of deposit (CDs), and the aforementioned low or no-fee accounts.

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