Self-Help Credit Union CDs - The Perfect CD Ladder?
Feb 13, 2006 - 7:20 PM by Ken Tumin
Self-Help Credit Union (SHCU) has been slowly but surely raising rates on its money market account and CDs. For those not aware of SHCU, it's one of the few credit unions in which anyone from any state can join by just paying a one-time $25 fee for membership into a non-profit organization (FOM).
SHCU disappointed many in late December when rates on its 3-month, 6-month and 12-month CDs fell by around 0.50% in one day. From December 26 to December 27, the rates changed as follows:
For at least two months previous to that, SHCU CD rates always remained within 0.10% from day to day.
The 3-month and 6-month CDs are still low, however, the 1-year is now at 4.97% APY. In addition, the longer term CDs have APYs well above 5%. The current CD rates as of February 13, 2006 are as follows:
Two Important SHCU CD Features
There are two important and unusual features about these CDs: one bad and one good.
Due to this no-withdrawal feature, you may not want to make a big investment into one of these long term CDs. Also, with the 5-year CD rate only 0.26% higher than the 1-year CD, there's little incentive to invest in the long-term CDs. However, because of the second feature, it does make sense to start long term CDs with the minimum required deposit of $500. This additional-deposit feature can allow for a very nice CD ladder. Below I give the details of this ladder approach.
Easy Way to Manage CDs
The other concern about SHCU is how to fund the CDs and ensure you lock in the high rates. You don't want to mail in a check and find out that the CD rates went down by 0.5% when SHCU received your application and check. To prevent this, I recommend first starting a SHCU money market account with at least $500 (it's currently paying 4.15% APY). Then you can link this account with your HSBC Online Savings account or other bank that allows linking to non-checking accounts. You can then transfer the money using an ACH push into the SHCU MMA. When the CD rates look good, you can call and purchase the CDs with funds from the MMA. When the CDs mature, you can call and request either a renewal or the funds be transfered back to the MMA. From the MMA, you're free to write a check or do an ACH pull (up to 3 withdraws allowed per month).
From my phone call with a SHCU representative, I confirmed that the above method should work. If you want paper checks, there's a $8 additional fee for a box of 50 checks. Also, you'll have to add $25 for the membership fee.
Advantages of the SHCU CD ladder over the typical CD ladder
First, to understand a typical CD ladder, refer to this article on laddering certificates of deposit. The unique features of the SHCU CDs allow for a better CD ladder approach. Here are some of the advantages:
An example of a SHCU CD ladder:
Graphical Representation of CD Ladder Example
In the example below, the CD id is the name of the CD. The notation refers to the maturity (i.e. 2y) followed by the year in which it started (i.e. 06). Additional deposits are noted by a plus sign followed by the year in which the additional deposit was made (i.e. +07). So the CD id 2y06+07 represents the 2-year CD started in 2006 with additional deposit made in 2007.
For simplicity the below example does not include the reinvestment of interest. Only the principle is carried forward in the example.
Starting the Ladder - Starting in 2006, put the maximum amount of your money in the 1-yr CD ($50K in this example) and the minimum amount in 2, 3, 4 and 5-yr CDs ($500). Every year afterwards, start a new 5-yr CD with the minimum amount ($500).
First choice if interet rates rise - New 1-yr CDs would have higher rate than previous longer term CDs. Starting in 2007, a new 1-yr CD would be funded with your maximum investment.
Second choice if interest rates fall - Previous longer term CDs have higher rates than current 1-yr CD. Deposit into previous CD that is set to mature within one year.
Rates rise and fall - Choice one and two above may alternate every year.
Risks
SHCU is NCUA insured so deposits under the limit should not be at risk. However, being able to earn high rates through low interest-rate environments may not last. SHCU may change the CD policy and not allow additional deposits into future CDs. In that case, you would have to revert to a typical CD ladder. SHCU rates may also become uncompetitive. In that case, you may be better off with transfering the money to other banks or credit unions.
SHCU is a small credit union with only about $184M in assets and about 16K members (per NCUA). As a comparison Pentagon Federal Credit Union has almost $8B in assets and almost 650K members (per NCUA). So with a liberal field of membership and with very high deposit rates, SHCU could attract so many new members and deposits that it may be forced to lower the rates.
Previous SHCU Posts
SHCU disappointed many in late December when rates on its 3-month, 6-month and 12-month CDs fell by around 0.50% in one day. From December 26 to December 27, the rates changed as follows:
3 month CD from 4.62% APY to 4.10% APY
6 month CD from 4.82% APY to 4.31% APY
12 month CD from 5.00% APY to 4.60% APY
For at least two months previous to that, SHCU CD rates always remained within 0.10% from day to day.
The 3-month and 6-month CDs are still low, however, the 1-year is now at 4.97% APY. In addition, the longer term CDs have APYs well above 5%. The current CD rates as of February 13, 2006 are as follows:
3-month term 4.25 4.34
6-month term 4.43 4.53
12-month term 4.85 4.97
24-month term 5.08 5.21
36-month term 5.07 5.20
48-month term 5.08 5.21
60-month term 5.10 5.23
Two Important SHCU CD Features
There are two important and unusual features about these CDs: one bad and one good.
- Bad: Early withdrawals are not allowed. Your money is totally locked until maturity.
- Good: You can add any amount to a CD without changing the term or rate
Due to this no-withdrawal feature, you may not want to make a big investment into one of these long term CDs. Also, with the 5-year CD rate only 0.26% higher than the 1-year CD, there's little incentive to invest in the long-term CDs. However, because of the second feature, it does make sense to start long term CDs with the minimum required deposit of $500. This additional-deposit feature can allow for a very nice CD ladder. Below I give the details of this ladder approach.
Easy Way to Manage CDs
The other concern about SHCU is how to fund the CDs and ensure you lock in the high rates. You don't want to mail in a check and find out that the CD rates went down by 0.5% when SHCU received your application and check. To prevent this, I recommend first starting a SHCU money market account with at least $500 (it's currently paying 4.15% APY). Then you can link this account with your HSBC Online Savings account or other bank that allows linking to non-checking accounts. You can then transfer the money using an ACH push into the SHCU MMA. When the CD rates look good, you can call and purchase the CDs with funds from the MMA. When the CDs mature, you can call and request either a renewal or the funds be transfered back to the MMA. From the MMA, you're free to write a check or do an ACH pull (up to 3 withdraws allowed per month).
From my phone call with a SHCU representative, I confirmed that the above method should work. If you want paper checks, there's a $8 additional fee for a box of 50 checks. Also, you'll have to add $25 for the membership fee.
Advantages of the SHCU CD ladder over the typical CD ladder
First, to understand a typical CD ladder, refer to this article on laddering certificates of deposit. The unique features of the SHCU CDs allow for a better CD ladder approach. Here are some of the advantages:
- Most of your money is available without penalty within one year. In the following example, over 96% is always available within one year. A typical CD ladder with 5 CDs would only have about 20% of your money available within one year.
- If interest rates rise, most of your money can be moved each year to the higher interest rate. In the following example, it would be over 96%. In a typical CD ladder, only about 20% of the CD would be able to be moved to the higher interest rate.
- If interest rates fall, most of your money can be moved each year to the higher interest rates available on previous long term CDs.
An example of a SHCU CD ladder:
- In 2006, start a CD ladder with $50K 1-yr CD and $500 2-yr, 3-yr, 4-yr and 5-yr CDs. Every year after, purchase one $500 5-yr CD.
- In 2007, if interest rate of a new 1-yr CD is higher than the 2006 2-yr CD, move the money from the 2006 matured 1-yr CD into a 2007 1-yr CD.
- However, if in 2007, interest rate of a new 1-yr CD is lower than the 2006 2-yr CD, move the money from the 2006 matured 1-yr CD into the 2006 2-yr CD.
- In 2008, a similar decision would be made. In this case the rate of a 2008 1-yr CD would be compared to the rate of the 2006 3-yr CD. In 2009, the comparison would use the 2006 4-yr CD. In 2010, the comparison would use the 2006 5-yr CD. In 2011, the comparison would use the 2007 5-yr CD, and this would continue each year.
Graphical Representation of CD Ladder Example
In the example below, the CD id is the name of the CD. The notation refers to the maturity (i.e. 2y) followed by the year in which it started (i.e. 06). Additional deposits are noted by a plus sign followed by the year in which the additional deposit was made (i.e. +07). So the CD id 2y06+07 represents the 2-year CD started in 2006 with additional deposit made in 2007.
For simplicity the below example does not include the reinvestment of interest. Only the principle is carried forward in the example.
Starting the Ladder - Starting in 2006, put the maximum amount of your money in the 1-yr CD ($50K in this example) and the minimum amount in 2, 3, 4 and 5-yr CDs ($500). Every year afterwards, start a new 5-yr CD with the minimum amount ($500).
CD id CD Total Year
06 07 08 09 10 11 12 13 14 15
CD 1y06 $50000 1-yr ----
CD 2y06 $500 2-yr --------
CD 3y06 $500 3-yr ------------
CD 4y06 $500 4-yr ----------------
CD 5y06 $500 5-yr --------------------
CD 5y07 $500 5-yr --------------------
CD 5y08 $500 5-yr --------------------
CD 5y09 $500 5-yr --------------------
CD 5y10 $500 5-yr --------------------
(cont.)
First choice if interet rates rise - New 1-yr CDs would have higher rate than previous longer term CDs. Starting in 2007, a new 1-yr CD would be funded with your maximum investment.
CD id CD Total Year
06 07 08 09 10 11 12 13 14 15
CD 1y07 $50000 1-yr ----
CD 1y08 $50000 1-yr ----
CD 1y09 $50000 1-yr ----
CD 1y10 $50000 1-yr ----
CD 1y11 $50000 1-yr ----
CD 1y12 $50000 1-yr ----
CD 1y13 $50000 1-yr ----
CD 1y14 $50000 1-yr ----
Second choice if interest rates fall - Previous longer term CDs have higher rates than current 1-yr CD. Deposit into previous CD that is set to mature within one year.
CD id CD Total Year
06 07 08 09 10 11 12 13 14 15
CD 2y06+07 $50500 2-yr ----
CD 3y06+08 $51000 3-yr ----
CD 4y06+09 $51500 4-yr ----
CD 5y06+10 $52000 5-yr ----
CD 5y07+11 $52500 5-yr ----
CD 5y08+12 $53000 5-yr ----
CD 5y09+13 $53500 5-yr ----
CD 5y10+14 $54000 5-yr ----
Rates rise and fall - Choice one and two above may alternate every year.
Risks
SHCU is NCUA insured so deposits under the limit should not be at risk. However, being able to earn high rates through low interest-rate environments may not last. SHCU may change the CD policy and not allow additional deposits into future CDs. In that case, you would have to revert to a typical CD ladder. SHCU rates may also become uncompetitive. In that case, you may be better off with transfering the money to other banks or credit unions.
SHCU is a small credit union with only about $184M in assets and about 16K members (per NCUA). As a comparison Pentagon Federal Credit Union has almost $8B in assets and almost 650K members (per NCUA). So with a liberal field of membership and with very high deposit rates, SHCU could attract so many new members and deposits that it may be forced to lower the rates.
Previous SHCU Posts
Featured Accounts
Useful Resources
Featured 1 Year CDs
Banking Guy (anonymous) - #1, Tuesday, July 4, 2006 - 1:35 PM
SHCU now allows early CD withdrawals with a penalty. The penalty is half of the interest you would earn over the term of the certificate. Refer to post for more info
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