What it means
Credit unions are member-owned, not-for-profit financial cooperatives. A member's deposits are called shares, and the return paid on them is called a dividend instead of interest.
A share draft account lets the member spend from the share balance. In daily use it behaves like a bank checking account.
The member can write drafts, pay bills, use a debit card, withdraw cash at ATMs and deposit at a branch. Investopedia notes that credit unions often charge lower fees and may not require minimum balances.
The NCUA explains that share insurance covers deposits in a share draft account, share savings account and share certificate at a federally insured credit union, and that insurance is provided automatically when a person joins such a credit union. The standard coverage is up to $250,000 per owner, per insured credit union, per ownership category.
A single account and a joint account are different categories, so a member can be covered above $250,000 in total at one credit union if the funds are split correctly, though the NCUA gives detailed rules and the limit has changed over time, so check the current figure. Bank checking accounts are insured by the FDIC instead of the NCUA, with a similar standard limit.
The main difference is who owns the institution. A bank is owned by shareholders who expect a profit, while a credit union is owned by its members.
The term is mainly used in the United States. Other countries have credit unions, cooperative banks and building societies, with different names, protections and rules.
Check local deposit protection before relying on cover. Membership is required, and it may depend on an employer, a place, a church or an association.
Many credit unions now accept the general public, so check the eligibility rules, fees, overdraft terms and dividend rates before opening one.
In practice
Real-world examples.
Example
A fictional member keeps $5,000 in a share draft account that pays a 1% annual dividend. The yearly dividend is $50 ($5,000 x 0.01). A bank checking account paying nothing on the same balance would earn $0, so the member also compares fees before deciding.
Example
A fictional bank charges a monthly maintenance fee of $12, which is $144 a year. The member's credit union account has no monthly fee. The yearly difference is $144 of avoided fees, so $50 of dividends plus $144 of avoided fees is $194.
Example
A fictional member holds $300,000 in one single-ownership share draft account at one insured credit union. Coverage is $250,000, so $50,000 is above the limit. Moving part of it to a joint account or another institution could change that, so the member asks the credit union to explain the ownership categories before moving anything.
Formula
Calculation
Annual dividend = balance x dividend rate. With $5,000 x 0.01 = $50, which is about $50 / 12 = $4.17 a month.
Yearly saving versus a fee account = monthly fee x 12 + dividend. With $12 x 12 + $50 = $144 + $50 = $194.
Uninsured amount = balance - coverage limit. With $300,000 - $250,000 = $50,000 above the limit for one owner in one ownership category. If the same $300,000 were held as $150,000 in a single account and $150,000 in a joint account, each category would sit under $250,000, so the whole amount could fall within the standard limit, subject to the NCUA's detailed rules.Case study
Seen in the real world.
This case study is fictional and illustrative. Ravi, 29, in Toronto, is tired of monthly fees on his bank account. A colleague tells him about a credit union in which he is eligible to join through his workplace. He asks for the fee schedule, the dividend rate and the overdraft terms in writing.
He also checks that the credit union is covered by the national deposit protection scheme. He opens a share draft account and moves his paycheck there. He keeps a small balance in his old bank until direct debits are switched. After six months he saves about $72 in fees (6 x $12) and earns a small dividend.
He finds the credit union has fewer branches, so he checks the ATM network before relying on it for cash. At the end of the first year he compares the total cost: no monthly fees, one out-of-network ATM charge and a small dividend, against the $144 he would have paid in maintenance fees at his old bank. The saving is real but modest, and he decides the lower fees are worth the smaller branch network because he rarely visits a branch.
Watch out
Common mistakes.
- Assuming the account is insured without checking that the credit union is federally insured.
- Overlooking the ownership category rules when balances are above the coverage limit.
- Skipping fee, overdraft and ATM network checks because the account is called low cost.
Questions
People also ask.
What is a share draft account?
It is a checking-style account at a credit union, held against the member's shares.
Is a share draft account insured?
At a federally insured credit union, NCUA share insurance covers it up to the standard limit per owner and category.
How is it different from a checking account?
The account works much the same way. The main difference is that a credit union is owned by its members and may pay dividends.
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