Credit Unions Vs. Banks for CD Safety and Returns

As of this writing, a typical 24-month Bank CD is earning an annual percentage yield of less than 2% - some are far less. Credit Union CD deposits for the same maturity are frequently a quarter to a half percentage point higher. All current interest rates for saving accounts are less than desirable, but even with dismal overall returns, a 12 to 25% difference in yield is worth consideration.

Why the rate difference exists

Banks are for-profit institutions. What they can afford to pay CD depositors is always rationalized with the demands of stockholders. Credit Unions (CUs) are not-for-profit cooperative enterprises and exist for the sole benefit of the membership. This structural difference gives an advantage to the CU in both lending and attracting depositors. CU members essentially lend money to one another. CUs return all profits to the member/owners by way of better rates, lower fees, and enhanced services.

Issues that slow down investments in Credit Unions

The public is simply not as well informed about CUs, as it is banks. Many people consider CUs too exclusionary because they are required to limit membership to certain affinity groups such as employees of a company or school, or a certain industry, or people who live in a specific community. This common bond requirement is called a Field of Membership (FOM), and it should not scare interested depositors.

The fact is, with a little effort anyone can find a CU that will accept his or her application for membership. Becoming part of the "in crowd" can be as easy as having a government job, career affiliation, attending a place of worship, being a member of the PTA or local library, etc.

Credit Unions are efficient

Credit unions exist to help the members, not to make a profit. Credit unions are generally much smaller than banks, and have a reputation for being more flexible where member services are concerned.

Credit unions are run by a volunteer board of directors that provides guidance to paid managers and employees. Each CU member has one vote at the annual meeting, a process very different from banks where the impact of a stockholder's vote depends on the number of shares of stock owned in the bank.

Credit Union CDs are not FDIC insured, but...

Many potential depositors are not aware that while most banks are insured by the Federal Deposit Insurance Corporation, most CUs are also insured and backed by the full faith and credit of the United States through the National Credit Union Administration (NCUA). Coincidently, the NCUA maintains the same account deposit coverage insurance limits as the FDIC, i.e. $250,000.

Not all banks are insured by the FDIC, and not all credit unions are insured by the NCUA. If you want government insurance on your CD savings in either institution - always ask before you invest.

There are over 7,500 credit unions in the United States. Click here to find one in your area.

The information contained herein is general in nature, is provided for informational purposes only, and should not be construed as tax or legal advice. Before you act on anything you read here or elsewhere, be sure to seek the counsel of your financial, and/or tax adviser. There are many roads to financial prosperity, get to know all your options.