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For Top Rates, Can Credit Unions Compete?


For Top Rates, Can Credit Unions Compete?

One of the things we’re proud of at DepositAccounts is how our patented rate-tracking technology isn’t built to monitor only banks, whose products dominate the coverage by most sites that list deposit rates. In the data universe we opted to create, more than 4,000 credit unions also populate our rate tables. Ranging from those with over a hundred thousand members and nationwide availability to tiny ones with a single branch and a mere one hundred members, credit unions play a fully co-starring role alongside banks on our stage of national, regional and local deposit rates.

Of course, our decision to track thousands of credit unions only goes so far in explaining why they appear on our site with any prominence. The other reason is simply that credit unions are typically among the most rate-competitive institutions a saver can access. Indeed, overlooking credit unions in your deposit portfolio would mean regularly missing out on a top available yield.

But exactly how often do credit unions give the very best-paying banks a run for their money? Are they a bit player once you enter the upper echelon of rates and the world of internet-only banks, or are they something more?

Since our rate search pages can provide a quick ranking of APYs for any deposit product at any point in time, we decided to run some tests to quantify exactly how competitive credit unions can be among the top-shelf national rates. And here's what we found.

A simple setup

We chose 10 standard deposit products to include in our analysis: four liquid accounts (personal savings, money market, standard checking, and rewards checking) and six different CD terms. We also decided to focus our lens exclusively on nationally available products, meaning banks and credit unions that accept deposits from customers living anywhere in the country and require no limiting membership terms.

We then searched our rate databases for these 10 products using a balance amount of $25,000, except for the two checking accounts, where we assumed a $5,000 balance. We pulled rate results on Monday, June 12, and included the ten best rates for each deposit product in our dataset.

Note that this means our data represents a snapshot in time, and our results wouldn't necessarily be precisely replicated in a future test. But since there's no reason to expect the current rate landscape is substantially different right at this moment than it would be at other times, we assume our findings are representative within a reasonable margin.

Tallying the credit union appearances

Starting with the four liquid account types, we quickly discovered that banks entirely dominate credit unions among the best-paying savings, money market, and standard checking accounts. In fact, among all the Top 10 rates for these three account types, credit unions offered only two of the top 30 rates.

Meanwhile, though, the script flips for rewards checking, where credit unions outnumber banks 4:1.

“liquid

The competition heats up when we shift to certificates of deposit. Here, credit unions put up a respectable fight in several CD terms. Although they don't dominate any of the CD rankings, they are just as likely as a bank to offer a Top 10 rate for longer-term CDs, like 4- and 5-year certificates. And for every CD category we tested, credit unions appear at least twice in the Top 10.

“cd

We did one additional analysis on CD rates from credit unions versus banks, checking whether their competitiveness changed for IRA CDs. But across three terms we checked (1-, 3- and 5-year maturities), the number of credit unions in the Top 10 rates was exactly the same for standard and IRA certificates.

Below we’ve pulled all our findings together, and arranged the list not by product but by competitiveness of credit unions for each deposit type. This sorting highlights that rewards checking truly is the anomaly, where banks hardly make any inroads. All the other liquid accounts, meanwhile, appear at the opposite end of the spectrum, with credit unions playing a negligible (or non-existent) part in the Top 10 mix.

“complete

As a last crunching of the numbers, we gathered the Top 10 rates for all 10 products into a collective group of 100 rates. Taken as a whole, almost a third (31 percent) were offered by credit unions. Drilling down then on the 69 top rates offered by banks, we found that almost half of the top products (49 percent) came from internet-only banks.

“pie

Drawing the obvious conclusion

Savers who overlook credit unions – or don’t understand their sometimes-wide availability – do so at their own return-on-investment peril. While internet banks are a difficult horse to beat in the rates race, nationally available credit unions still manage to pull ahead 3 out of 10 times. And they outnumber physical banks 3:2 among the Top 100 rates.

The case for paying credit unions the attention they deserve is further strengthened when you include restricted credit unions. Though they aren't available to savers nationwide, they may be open to you, depending on your residency, current or former employer, or affiliation, such as a military background. And several credit unions with membership requirements would rival the Top 10 rates we looked at here. So in addition to shopping the national "easy access" credit unions, be sure to also shop locally, which you can easily do by indicating your city and state when you use our rate search tables.

Related Pages: banking tools and data
Comments
Bozo
Bozo   |     |   Comment #1
The American Bankers Association has long argued that credit unions should be taxed just like banks. The argument does have some merit. An "easy to join" credit union which offers a full range of products and services, advertises in your Sunday paper, and competes with banks across the board, should be taxed like a bank, the ABA argues. For example, is PenFed a credit union, or a bank pretending to be a credit union?

I've yet to see a persuasive counter-argument to the ABA's position.
LuvCD
LuvCD   |     |   Comment #2
Look at the membership base, local management, range of permitted investments, int'l presence, etc. Bozo, you don't need to look too far...ask your investment ____ son, he may have a lot of insight.
Bozo
Bozo   |     |   Comment #4
LuvCD, with all due respect, I have no clue as to what you are saying. Or were trying to say.
LuvCD
LuvCD   |     |   Comment #8
Look at the business models. One or two large CUs is not determinative. ABA must focus on an entity that is non-military in primary emphasis
Rico
Rico   |     |   Comment #3
I would venture an educated guess that credit unions have a lower ROA and smaller net interest margin than banks. In general credit unions offer lower rates on loan products and lower fees on deposits and loans. In addition credit unions rely on limited sources of revenue. They do not have sophisticated trading and bond underwriting departments, or a multitude of subsidiaries dealing in who-knows-what financial products. As mutual institutions, they have no access to the capital markets to compete with publicly owned(in most cases), capital stock banks. Taxing credit unions would result in higher loan rates and fees, and lower deposit rates. We probably would see fewer credit unions.
Bozo
Bozo   |     |   Comment #6
Rico, I would agree, if credit unions were limited to the FOMs initially considered. PenFed (where I am a member, by the way), is probably the poster-child for the ABA. If you can't find a way to join PenFed, well, just call them.

Lest you think I am dumping on PenFed, I'm not. It's any "easy to join" credit union, found here on Ken's blog. My whole point was the tax advantage for credit unions. It is not fair for a bank to masquerade as a credit union. Period.
Bogie
Bogie   |     |   Comment #5
The ABA's position has no merit. Your example is meritless as well. According to all the rules and regulations governing credit unions, PenFed is a legitimate credit union.

The ABA doesn't like completion. They want it ALL. "To big to Fail"
Bozo
Bozo   |     |   Comment #7
Aargh. Bogie, seriously? When a credit union walks like a bank, advertises like a bank, offers products and services like a bank, has a field of membership (FOM) open to the world, why is it not, in effect, a bank? Why should it not then be taxed as a bank? That was my point.

For example, let's assume the local juice bar in town offered tax-free slurpies, because the State decided the beverages were from a credit union. Down the road, a local vendor of the exact same drink had to pay state sales tax.

Would that be fair?
Rico
Rico   |     |   Comment #10
Bozo, As others have said, credit unions are much more limited in their investment and lending options, and as a result, revenue, both real and potential is limited. They have no shareholders and therefore limited to earnings as a source of capital. I am also a PenFed member(although their rates have taken a nose dive) who values their competitive deposit rates. Credit unions face an uneven playing field against banks.
Bozo
Bozo   |     |   Comment #12
Rico, I'm just having a hard time wrapping my head around the notion that PenFed and USAA should be taxed differently. And, yes, I'm a member of both.
Rico
Rico   |     |   Comment #18
USAA is an old fashioned savings bank, very similar to the old savings and loan associations. There are a few of the old S & L's left. They would be taxed like a commercial bank although their range of activities is more limited. I was also a member for years until their rates took a terrific drop. The key to the PenFed tax status is nonprofit. If credit unions are taxed, you can competitive CD kiss rates
goodbye. Bye the way, several years ago, USAA tightened requirements to become a member.
CuriousDave
CuriousDave   |     |   Comment #35
Missing from the discussion is the issue of customer service, for which there is no monetary metric but which does matter. The two credit unions to which I now belong, for instance, have a long history of courteous and prompt service, compared with the miserable service experienced with my current bank and both of my two previous banks. What was particularly surprising was that the credit unions, supposedly having no profit motive, went out of their way to answer my questions and to keep my account, while the staff (and, in the case of my prior two banks, even the managers) were not only inept and slow but, far worse, displayed no interest at all in keeping me as their customer, especially considering the sizable amounts I had invested with them.
hank
hank   |     |   Comment #9
the argument has no merit. credit unions are non profit institutions. Banks are for profit
Bozo
Bozo   |     |   Comment #13
Hank, as noted above, the PenFed versus USAA conundrum is where I begin to see the ABA's point. Both ostensibly target the same FOM, although PenFed is arguably easier to join than USAA. USAA books profits, but returns them to members (well, sort of) in the form of SSAs (dividends). So, USAA is sort of, kinda, almost, a co-op. Like a credit union.

USAA floods the airwaves with its ads. PenFed floods the print media with its ads. Each offers basically the same array of products. Each is (theoretically) a non-profit. Each has members, but no shareholders. One is a bank (USAA Federal Savings Bank) and the other a credit union (PenFed).

My casual understanding of Federal and State tax law is that banks are taxed on profits. Credit unions are not, since, by definition, they must be "non-profit". Query: who defines "profit" for a credit union?
Bozo
Bozo   |     |   Comment #14
Then, of course, there's the expanded FOM of Navy Federal. Any person who is a descendant of anyone, seriously, anyone, who served in the military, is eligible. I guess that covers just about all of us.

If you don't have a clue how to join PenFed, and seem put off by USAA, I'll bet your great-great-great granddaddy served either with U.S. Grant or Robert E. Lee.

You thus qualify for membership in Navy Federal.
Att
Att   |     |   Comment #15
I agree with you Bozo that Credit Unions should pay taxes. Becoming a member in s Credit Union is like being a member of Costco. Credit Unions in the past were small with a focused membership or group. Now we have many mega sized credit unions.The law to create credit unions was signed into law by FDR.
Bozo
Bozo   |     |   Comment #19
Att, I'm not opposed to credit unions. Last I checked, I belong to three (PenFed, Alliant, and Patelco). But you hit on a valid point. The initial concept (the law signed by FDR) was to offer a cooperative (some might say socialist) alternative to for-profit banks. Fields of membership (FOMs) were limited. Credit unions were, indeed, "unions" of persons in a limited FOM, pooling and lending money for the benefit of the FOM. Tax-exempt status made sense, or so it was believed at the time.

That having been said, I doubt that any tax reform package (assuming we ever get one) will address the issue.
Att
Att   |     |   Comment #20
I'm a member of 4 credit unions. My CD money goes where I get the highest rate and if it's a credit union they get may cash. I find it strange that the leaders on savings account rates are banks and not Credit Unions. Also, some credit unions offer low rates even with their tax advantage.
Bozo
Bozo   |     |   Comment #23
Att, as my astute banker advised me, it's all about cross-marketing and "new money" these days. I received an e-mail from PenFed a couple of days back "alerting" me to "hush-hush" deals. I was curious, so I read the e-mail. Turns out, the deals were nothing more than those offered on the website. Yes, you have to be a member of PenFed. That's not a terribly high bar these days.

And, after jumping through all those incredibly-simple hoops, you are rewarded with a seven-year CD rate barely above 2%.

That said, their e-mail solicitations are fairly amusing.
CuriousDave
CuriousDave   |     |   Comment #36
Credit Unions are non-for-profit organizations and do not necessarily exist to offer top rates to their members. Some of them focus more on offering other benefits for members such as lower loan interest rates.
Bogie
Bogie   |     |   Comment #21
Aargh, no reason for any tax reform package. to address your perceived issue. There are certainly more serious concerns to be dealt with when considering tax reforms.
Bozo
Bozo   |     |   Comment #24
Bogie, I so agree. The issue I note is but a fly-speck, of interest only to lobbyists and policy-wonks. Even if it caught someone's attention (which would require a great leap of faith), the odds of passage out of Ways and Means, thence to the floor, thence to the Senate, well, you get my drift.

I mean, how many years did it take for Congress to wake up to the "spousal benefit" loophole? It was only after folks on social media began calling the loophole "free money", costing the SSA many millions of dollars each year, that Congress awakened.

There was never any justification for the loophole. It was just a legislative freak of nature.
Bozo
Bozo   |     |   Comment #25
My favorite poster-child for idiotic laws is the Social Security Spousal Benefit. Until recently, a spouse could claim on his or her spouse's record, at FRA (age 66), and receive 50% of the amount his or her spouse would have received at his or her FRA.

Meanwhile, the spouse would continue to amass DRCs (delayed retirement credits) on his or her own account.

This spousal benefit totally upended the concept of age-neutrality, but was totally legal.

My wife collected for four years under the old law. She is now collecting under her own record.
Forrest_Gump
Forrest_Gump   |     |   Comment #27
Not exactly. There the first credit union legislation was in Massachusetts in 1908.
hank
hank   |     |   Comment #16
it's like non profit hospitals vs for profit. the institutions define themselves and there are rules that they are supposed to follow. whether they follow them is another question. Many executives at non profits are very highly paid and they behave like for profits. remember eliot spritzer going after some of these
Att
Att   |     |   Comment #17
Non profits get other breaks too. They don't pay property taxes. We had Champion Paper HQ in my town. They built a beautiful new headquarters and they were paying big property taxes. When they were taken over they sold the building to the Salvation Army. They don't pay taxes. Nice building with covered parking. I don't know of Credit Unions are exempt from property taxes.
Bogie
Bogie   |     |   Comment #22
Our federal government and most of our state governments are non-profit organizations too. Always operating in the red and digging themselves a deeper and deeper whole. While the executives (in this case, politicians) keep giving themselves substantial pay raises.
Bozo
Bozo   |     |   Comment #26
Bogie, I agree, but the irony is folks keep re-electing them. Were I King, which I am not, I would do away with any ballot indicating "incumbent" or similar. Political scientists far and wide opine that incumbents fare much better than challengers. Simply having that "incumbent" label is golden.

Two simple rules: (1) old folks vote; (2) old folks hate change.
Bogie
Bogie   |     |   Comment #33
Simple cure for that, term limits. Two terms and you're OUT!

It's good enough for the top office of the United States, it should be mandatory for ALL elected politicians.
Inflation_Hawk
Inflation_Hawk   |     |   Comment #28
Huh?

Then why does this website show that credit unions currently have the highest rates for 1,2,3,4 and 5 year CD's?

Lies, ****ed lies - and, statistics.
Bozo
Bozo   |     |   Comment #29
Inflation Hawk, some credit unions do show better rates than banks. Your comment is well-taken. I might also disagree with the analysis of the author of the article, but I would hardly call the conclusions "lies". Cherry-picking data is not new. PhD candidates do it all the time.

Now, if you really wanted to have fun, you'd depose the folks at BLS. They are the masters at cherry-picking data.
Bozo
Bozo   |     |   Comment #31
I assume the book is still available at Amazon, but, if not, your local library might have it. It's a classic. My favorite chapter was the "Over-Impressive Decimal Point".

Yes, it's still on Amazon (and getting rave reviews to this day). For anyone who finds math books totally dull and boring (as do I), "How to Lie With Statistics" is about as good as it gets.
Ann
Ann   |     |   Comment #32
I'm guessing it was this bit that caused many of those credit union rates to be excluded:

"We also decided to focus our lens exclusively on nationally available products, meaning banks and credit unions that accept deposits from customers living anywhere in the country and require no limiting membership terms."
deplorable 1
deplorable 1   |     |   Comment #34
My best 2 CD's are from credit unions 2% 17 month and 2.5% 5 year the banks couldn't touch those rates when I opened them.
TRUST EXPERTS
TRUST EXPERTS   |     |   Comment #37
IF YOU VETTED THE RESUMES' OF THE PEOPLE IN CHARGE OF THESE COMMUNITY CREDIT UNIONS YOU WOULD THINK OTHERWISE OF PUTTING SERIOUS MONEY INTO THEM FOR A FEW BIPS MORE,,,,if you are a low end type,,,,,in need of a low cost loan for your low end life,,,,what you worry???,,,,,