Credit Union Terminology for CDs & Deposit Insurance

More savers may be leaving their banks this year as their CDs mature and they see how low the new CD rates are. As many readers of this blog know, the best rates are often at credit unions. This may cause more people to look into credit unions, and they may be confused by some of the terminology. One reader left a comment asking what the difference was between CDs and PenFed's money market certificates. Also, he was concerned if these would have the same insurance coverage as bank CDs.

I don't know why PenFed calls their CDs "money market certificates". In summary, they are essentially the same as bank CDs, so I usually call them CDs for short. The "certificate" part makes sense. It's common for credit unions to leave off "deposits" for the names of their accounts. The reason is that deposits are called shares at credit unions since they represent an ownership in the credit union. Consequently, a savings account is often called a share account and a certificate of deposit is often called a share certificate.

Several credit unions leave off the word share in their account names. For example, Alliant Credit Union uses the name "regular savings" for its main savings account. For CDs it uses the name "certificates".

One reason PenFed may include "money market" before certificate is to differentiate it with the IRA certificate. I can understand why this creates confusion since "money market" is usually in the name of savings accounts that provide limited check writing. Money market accounts have variable rates and no fixed term. However, PenFed's money market certificates are CDs with fixed rates and fixed maturities.

On the issue of deposit insurance (or share insurance for credit unions), the National Credit Union Association (NCUA) provides share insurance coverage for the vast majority of credit unions in the nation. This coverage is essentially identical to what the FDIC provides to banks. Here's how the NCUA defines what is covered (under "How Do I Know If My Credit Union Is Federally Insured?"):

NCUA share insurance covers all types of deposits received at a federally-insured credit union, including deposits in a share draft account, share savings account, or time deposit such as a share certificate. NCUA insurance covers depositors' accounts at each federally-insured credit union, dollar-for-dollar, including principal and any accrued interest through the date of the insured credit union’s closing, up to the insurance limit.

It should be noted that not all credit unions are federally insured by the NCUA. A few credit unions in some states only have private deposit insurance via the company American Share Insurance (ASI). Only state-chartered credit unions can drop federal insurance. All federal credit unions (with federal in their names) must be federally insured by the NCUA. I have more details on ASI in this blog post.

One problem with name "money market" is that it's not only used in "money market accounts" but also in "money market funds". A money market fund is short for money market mutual fund. This is not a deposit account at either a bank or a credit union. It's usually offered at brokerages. They are managed conservatively with investments in short-term, fixed income securities. However, there is typically no FDIC or NCUA insurance coverage for money market funds.

If you're looking for CDs with higher rates than what your banks are offering, don't be afraid of credit unions. Their share certificates are the same as bank CDs. Also, the certificates at federally-insured credit unions have essentially the same deposit insurance coverage as bank CDs.

Here are some references if you want to learn more about credit unions:

• An Overview of Credit Unions
• The Differences between Credit Unions and Banks
• Basic Credit Union Features
• Overview of Credit Union ASI Insurance
• Resources to Help You Support Your Local Credit Unions

For more information on PenFed and its CDs (money market certificates), please refer to my latest PenFed CD review.

Edit 1/13/2012: Added more details about which credit unions may not have federal insurance.