If you are shopping for a certificate of deposit (CD), there are many options available to you. Hundreds of institutions offer CDs, from your small 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 widely from institution to institution. In this article, we’ll look at how CDs work at banks and credit unions and help you decide which type of institution is right for you.
Key points to remember
- A typical certificate of deposit (CD) works the same whether it’s issued by a bank or a credit union.
- Most CDs at banks or credit unions are federally insured by 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 financial institution to another.
CDs from credit unions versus CDs from commercial banks
Typical certificates of deposit work the same whether they are issued by a commercial bank or a credit union.
When you take out a CD, you agree to leave your money in the account for a specific period of time. In exchange, the issuer will usually pay you a higher interest rate than they offer on their standard (and more liquid) savings accounts. If you need to withdraw your money 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 they promise you when you sign up. Another is that most CDs are federally insured. The Federal Deposit Insurance Corporation (FDIC) provides insurance to most banks, and the National Credit Union Administration (NCUA) provides it to 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 US government, even if that institution goes bankrupt.
In addition to banks and credit unions, you can also purchase CDs from brokerage firms or independent sales representatives. These are known as traded CDs. A major difference between traded CDs and other types is that traded CDs often trade in the secondary market, making it possible to sell your CD before the end of its term if you need to. But beware, as traded CDs are not always FDIC insured.
Credit unions vs commercial banks
Although CDs work the same whether they are issued by banks or credit unions, some people prefer one type of institution over another.
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 across the country. However, some credit unions 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 ATMs at no additional charge.
- Credit unions have a reputation for providing more personalized customer service, while larger 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 tell which 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 researching how their rates compare to those you can earn elsewhere.
Before the Internet, your CD choices were basically 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 staggering. For example, Investopedia’s Best Bank CD Rates are based on approximately 200 banks that accept clients nationwide.
Which is better: a commercial bank or a credit union?
It depends on your personal preferences. When it comes to CDs, the interest rates paid by banks and credit unions as a group tend to be similar, although they can vary from institution to institution.
Are CDs from banks and credit unions safe?
Yes, if they are federally insured, like most CDs are. When you open a CD with an FDIC or NCUA insured institution, up to $250,000 of your money in that institution is protected by the US 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 for terms ranging from a few months to several years. This is important because you could face significant early withdrawal penalties if you have to withdraw your money prematurely. Because CDs are otherwise quite similar, you can then shop around for a CD with the best interest rate for that particular term. But make sure it’s covered by FDIC or NCUA insurance.
Under what conditions are the CDs available?
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 are 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 the term of a CD, the higher the interest rate it is likely to pay. However, your money will be inaccessible to you (without penalty) for a longer period and it will also be more subject to the risk of inflation.
A typical certificate of deposit (CD) works the same whether it’s issued by a bank or a credit union. Choosing between the two types of financial institutions is largely a matter of personal preference, although shopping around for a competitive interest rate can be beneficial.