Do Banks or Credit Unions Pay Higher Interest?
Credit unions usually pay higher interest rates on deposit accounts than banks do because credit unions are not-for-profit entities whereas banks are for-profit entities. However, a number of different factors have an impact on interest rates including term time and the financial strength of individual banks and credit unions. Therefore, you should shop around for the best rate rather than assume the credit union has the best deal.
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Term Times
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Certificates of deposit accounts typically have fixed interest rates and pay higher rates of return than variable rate products such as money market accounts or savings accounts. CDs have term times that can range from just a few days to several years. While CDs with a variety of term times are available all of the time, financial institutions usually have one or two CDs with promotional rates that are much higher than the rates available on regular CDs. One institution may have a promotional rate on a six-month CD while another may have a promotion on a three-year CD. Decide how long you can commit the money to the CD and then shop for the best rate. While credit union rates are generally higher, you may find that a bank has a promotional rate on the exact term you are looking for that beats the credit union rates.
Projections
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Interest rates on CDs and savings accounts are impacted by the financial institution's business model. Financial institutions that are attempting to expand may offer above average rates in order to attract new customers. When pricing deposit accounts, these institutions weigh the short-term interest expense with the long-term benefit of having an increased number of customers who may later want to take out loans and credit cards. An institution with a large share of the local banking market has little room for expansion and could even lose money by offering high rates on deposit accounts. Therefore, business models have an impact on rates offered by banks and credit unions.
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Credit
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Financial institutions can borrow money from the federal government or from deposit account holders. When interest rates are low, financial institutions with good credit ratings can borrow money very cheaply from the government. Consequently, CD and money market rates at these institutions are low because it makes no sense to pay high rates to borrow money from consumers rather than obtain money inexpensively from the Federal Reserve. However, financial institutions with poor credit have to pay a premium to borrow money from the Federal Reserve or other institutions. Consequently, financially troubled institutions are more inclined to pay high CD rates. Therefore, high rates can expose you to danger if your account balances exceed the $250,000 federal deposit insurance limit.
Considerations
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Credit unions are member owned, which means you as a voting member can have a direct say in the management of the credit union. You have no control over the interest rates offered by banks. However, you can only join a credit union if you meet its membership requirements, and these requirements vary from one union to the next. Anyone can open an account at a bank. Both banks and credit unions also offer bumped-up interest rates to customers who make large deposits and have multiple accounts. Therefore, while credit unions generally offer the best rates, a lot depends on the individual institution and your relationship with it.
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