Dividends or Interest – What’s the difference?

We run into a lot of confusion over the use of the terms dividends and interest in credit union account advertising and disclosures. Federally chartered credit unions cannot offer interest-bearing deposit accounts, only dividend-bearing accounts. State chartered credit unions can offer dividend-bearing or interest-bearing accounts, and in some cases both, depending on state law and the credit union’s bylaws.

So, what’s the difference?

Truth in Savings (12 CFR 707) defines both dividends and interest –

Dividend and dividends mean any declared or prospective earnings on a member’s shares in a credit union to be paid to a member or to the member’s account.

Interest means any payment to a member or to a member’s account for the use of funds in a nondividend-bearing account at a state-chartered credit union offered pursuant to state law, calculated by application of a periodic rate to the balance.

That doesn’t help a whole lot…

Fortunately, Staff Interpretations explains the difference further –

Differences between dividends and interest. Generally, dividends are returns on an equity investment (shares); interest is return on a debt investment (deposits). Dividends, in general, are not properly payable until declared at the close of a dividend period; interest, in general, is properly payable daily according to the deposit contract. Dividend rates are prospective until actually declared; interest rates are set according to contract in advance and are earned on that basis. Share accounts establish a member (owner)/credit union (cooperative) relationship; deposit accounts establish a depositor (creditor)/depository (debtor) relationship.

Commentary also states that “…under no circumstances may a credit union describe a share account as a deposit account, or vice versa. For example, the term “certificate of deposit” or “CD” may not be used to describe share certificates and other dividend-bearing term share accounts…”

Note that credit unions paying dividends on their certificates cannot use the terms “certificate of deposit” or “CD” to describe the account. “Share certificate,” “certificate account,” “certificate,” or “term share account” are permissible.

Still have questions?

We can help. Our highly knowledgeable staff of auditors and consultants can help make sure your credit union is in compliance. From marketing and disclosure reviews to Truth in Savings audits, we can do it all. Contact Us.

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