If you are shopping around for a certificate of deposit (CD), there are many options available to you. Hundreds of institutions offer CDs, from your tiny local credit union to huge multinational banks. The good news is that there is no essential difference between the CDs they typically offer—although interest rates can vary substantially from one individual institution to another. In this article, we'll look at how CDs work at both banks and credit unions and help you decide which type of institution is right for you.
- A typical certificate of deposit (CD) works the same way whether it is issued by a bank or a credit union.
- Most CDs at banks or credit unions are federally insured by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), up to certain limits.
- Neither banks nor credit unions as a group pay consistently higher interest rates. However, rates can differ significantly from one individual financial institution to another.
Credit Union CDs vs. Commercial Bank CDs
When you take out a CD, you commit to leaving your money in the account for a set period of time. In exchange, the issuer will generally pay you a higher rate of interest than it offers on its standard (and more liquid) savings accounts. If you need to get your money out before the end of the CD's term you will often incur an early-withdrawal penalty, sometimes a substantial one.
CDs are among the safest investments available. One reason is that the bank or credit union guarantees the interest rate it promises you when you sign up. Another is that most CDs are federally insured. The Federal Deposit Insurance Corporation (FDIC) provides insurance for most banks, and the National Credit Union Administration (NCUA) provides it for most credit unions. When you open a CD with an FDIC- or NCUA-insured institution, up to $250,000 of your money on deposit with that institution is protected by the U.S. government, even if that institution were to fail.
In addition to banks and credit unions, you can also buy CDs from brokerage firms or independent sales representatives. These are known as brokered CDs. One major difference between brokered CDs and other types is that brokered CDs often trade on the secondary market, making it possible to sell your CD before its term is up if you need to. But beware, as brokered CDs are not always FDIC-insured.
Credit Unions vs. Commercial Banks
Though CDs work in the same basic way whether they are issued by banks or credit unions, some people prefer one type of institution over the other.
There are a number of reasons for this:
- Credit unions tend to have lower fees and better interest rates on savings accounts and loans.
- Banks' mobile apps and online technology tend to be more advanced.
- Banks often have more branches and ATMs nationwide. Some credit unions, however, participate in the Co-op Shared Branch network, which allows their customers to do business at some 5,600 physical locations and more than 30,000 surcharge-free ATMs.
- Credit unions have a reputation for providing more personalized customer service, while large banks tend to have stricter rules and may have less flexibility in decision-making.
When it comes to CDs, the interest rates offered by different institutions are so variable that it's impossible to say that either banks or credit unions offer higher rates. That's why it can be a mistake to just open a CD at the bank or credit union where you already have other accounts without investigating how its rates compare with those you can earn elsewhere.
Before the internet, your CD choices were essentially limited to what you could find in your community. But with the proliferation of online banks—and traditional banks with online portals—the number of CDs you can consider is astounding. For example, Investopedia's list of best bank CD rates is based on about 200 banks that accept customers nationwide.
Which Is Better: A Commercial Bank or a Credit Union?
It depends on your personal preferences. In terms of CDs, the interest rates paid by banks and credit unions as a group tend to be similar, although they can vary from one institution to another.
Are Bank and Credit Union CDs Safe?
Yes, if they're federally insured, as most CDs are. When you open a CD with an FDIC- or NCUA-insured institution, up to $250,000 of your money at that institution is protected by the U.S. government.
What Is the Best CD?
The best CD for you will depend on several factors. One is how long you can afford to tie up your money—CDs are available in terms lasting from a few months to a number of years. That's important because you could face substantial early-withdrawal penalties if you need to get your money out prematurely. Because CDs are otherwise fairly similar, you can then shop around for a CD with the best interest rate for that particular term. But make sure that it is covered by either FDIC or NCUA insurance.
What Terms Are CDs Available For?
You can buy a CD that matures in as little as a month or as long as 10 years or more. The most common terms you're likely to see at banks and credit unions today are three months, six months, one year, two years, three years, and five years. The longer a CD's term, the higher the interest rate it is likely to pay. However, your money will be inaccessible to you (without a penalty) for a longer period of time and it will also be more subject to inflation risk.
The Bottom Line
A typical certificate of deposit (CD) works in the same way whether it is issued by a bank or a credit union. Choosing between the two types of financial institutions is largely a matter of personal preference, although it can pay to shop around for a competitive interest rate.