Credit unions offer better CD yields
By Laura Bruce • Bankrate.com

Investors who like to keep some of their fixed-income money in certificates of deposit have been frustrated by months of steadily declining interest rates.

Many Bankrate.com readers have laddered CD portfolios and are reluctant to reinvest proceeds from a matured CD at such low rates.

Perhaps it's time to look at the returns being offered by credit unions.

Monthly surveys conducted by Bankrate.com show credit unions consistently offering higher interest than banks and thrifts on CDs, often better by more than a half-percent.

In the latest survey, six-month credit union CDs had a national average yield of 1.71 percent compared with 1.26 percent at thrifts and 0.95 percent at banks. The yield on one-year CDs showed similar discrepancies with credit unions offering 2.02 percent vs. 1.48 at thrifts and 1.07 at banks.

Profit-sharing power
The main reason for the wide difference is credit unions are cooperative institutions, says Jay Johnson, executive vice president at Callahan & Associates, a Washington, D.C., credit union research and consulting firm.

"All the earnings are returned to the members in the form of higher savings rates or lower loan rates or goes back into the institution. They're not looking to earn a profit to pay to outside shareholders. Banks have to return profits to their shareholders."

Tom Dorety, chief executive officer at Suncoast Schools Credit Union in Tampa, Fla., says being nonprofit makes it cheaper to run the business.

"We have a distinct advantage, our expense ratios are far lower than [a bank's]. We're returning money to our members, our owners."

People have been noticing that credit unions offer better rates. Membership increased 2.0 percent nationwide last year and savings deposits increased 10.8 percent, reported the National Credit Union Association.

To find the latest high rates for certificates of deposit, go to Bankrate's rate charts.

"A lot of the growth in deposits is a reaction to the volatility in the stock market. Most of it comes from current members, but people have been looking for better rates and the credit unions have been the beneficiary of that," says Johnson. "By the end of last year, there was a 24 percent increase in money market deposits. The key is converting that into longer-term deposits."

It's not just credit unions that have seen millions of dollars flow into their money market coffers. Banks and thrifts are participating in the boom also as people try to preserve principal by dumping stocks and mutual funds.

But even in lowly money market accounts, credit unions reward savers with a much higher return. Bankrate.com's most recent survey shows credit unions paying a national average of 1.31 percent, while thrifts offer 0.85 percent, and banks trail the pack with a paltry 0.21 percent.

Small packages
Despite their success, credit unions, the David of the financial industry, are still no threat to the banking Goliaths.

"All of the assets of all of the 8,000 credit unions in the U.S. don't equal the assets of Citicorp," says PATELCO's Waite.

But that doesn't stop credit unions from thinking fast and exploiting opportunities that might encourage you to say adios to your bank and howdy to the local credit union.

"We deploy specialized savings products in rapid order," Waite says. "After Sept. 11, when we knew there'd be a lot of nervousness, we launched a freedom account which offered a very attractive rate for about 90 days to allow members to deposit with us and give them time to figure out what their immediate and long-term goals would be."

PATELCO also offers a high-rate 90-day CD for people to stash their tax refund. Members stuffed $225 million into those CDs last year, according to Waite, and almost all of it remains with the credit union today.

"We try to come through with exceptional values on a periodic basis and we've added a lot of members through those offerings."

If you don't belong to a credit union, it's easier than ever to join one. More and more credit unions are going to a community membership as opposed to being tied to a specific company, industry or union.

"Originally, we were formed to service Pacific Telephone employees," says Waite. "Now, we offer membership to employees and family members of about 2,000 companies. We also have an expansive community membership. Anyone who lives, works or worships in over 40 communities in northern California can join. Basically, if you walk past our front door, you can join."

Bankrate has plenty of information if you're interested in finding out more about credit unions, how to join one or how to start one.