Are Christmas club accounts still a good idea?

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Your mother probably had a Christmas Club account. You might remember her faithfully depositing $5 or $10 a week all year long to save up for the holidays.

This simple method of saving reached its height of popularity in the 1970s. But some people believe they’re still useful for bank customers and credit union members today.

“Anything that helps people easily save money is relevant and necessary,” says Leslie Copeland, chief strategy officer at Ascend Federal Credit Union. “Our members can use a Christmas Club account to save for whatever they want, like a vacation, a major purchase, or Christmas gifts.

What is a Christmas Club account?

A Christmas Club is a short-term account set up by a financial institution to encourage consumers to set aside money for the holidays.

Rules and requirements for Christmas Club account holders can vary from one bank or credit union to another. With some accounts, there’s the opportunity to earn interest. And at some banks, Christmas Club accounts more closely resemble CDs. There’s a penalty for any withdrawal that happens prior to a certain date during the holiday season.

At Ascend, their Christmas Club account isn’t that different from their traditional savings account.

“Our Christmas Club account has no minimum opening deposit, it earns a monthly dividend, and it’s easily accessible at any time without penalties,” Copeland says. “But for many people, it’s a psychological thing – a Christmas Club is a ‘set-it-and-forget-it’ account to save strictly for Christmas presents.”

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Why use a Christmas Club account?

Many Americans have a hard time setting aside money for the future. And when the holidays roll around, it’s tempting to overspend.

By opening a Christmas Club account, consumers can prepare for the holiday season and manage their finances better than they otherwise would, says Mike Schenk, chief economist for the Credit Union National Association. One easy way to get into the habit of saving for the holidays, he says, is to set up direct deposit so that a portion of your paycheck is automatically deposited into your account.

Having your savings in a separate account might make it easier to avoid touching those funds and spending them on accident. It might also help you avoid a credit card debt crisis when January rolls around.

Most Christmas Club accounts can be opened with a small deposit. At HOPE Federal Credit Union in Jackson, Mississippi, for example, the minimum balance is just $10.

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Where to find a Christmas Club account

Some small banks offer Christmas Club accounts.

“They are typically community-based institutions that generally know their customers better than the big money center banks would or the retail banks would,” Schenk says. “Because of that, they’re a little bit more interested in the overall financial health of those consumers that do business with them and a little bit less focused on generating higher and higher dividends and higher and higher profits.”

But credit unions, by far, are still the champions of this type of savings vehicle. According to recent data from the Credit Union National Association (CUNA), most credit union members have access to a Christmas Club account.

Joining a credit union is easier than ever. In many cases, if you can’t qualify for membership based on where you live, work or worship, you can probably join an organization like the American Consumer Council that allows you to become eligible for credit union membership. Before selecting a particular bank or credit union’s Christmas Club account, Schenk recommends shopping around and using a website like yourmoneyfurther.com to find a credit union in your area.

Disadvantages of Christmas Club accounts

A downside to using a Christmas Club account is that you likely won’t earn much in terms of interest. At some banks, these accounts pay less than 1 percent APY.

An early withdrawal penalty could be another obstacle. At American Bank & Trust, for instance, in Bowling Green, Kentucky, the penalty for pulling out your savings before your account matures is $20. That kind of penalty could take a big bite out of your savings if you find yourself needing the money you’ve set aside for other purposes. Of course that’s the point of the account – to make sure the funds for your holiday shopping spree are separate from the dollars you plan to use to meet other financial goals.

In some cases, your bank or credit union may also cap the amount you can save in a Christmas Club account. There could also be a set amount you’re required to deposit on a monthly basis.

Bottom line: As with any bank account, it’s best to read the fine print and understand all of the terms and conditions before signing up for a Christmas Club account.

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Alternatives to Christmas Club accounts

Other than a do-it-yourself savings account you designate exclusively for the holidays, there are other ways to sock away money that will get you a better return on your investment than a traditional Christmas club account would.

For example, you can throw in a lump sum (if you have it) into a high-yield CD. Just make sure the account matures before you start your Christmas shopping.

Savings and money market accounts may offer more flexibility and liquidity than a Christmas Club account. Plus, if you look for online options, you’re bound to find an account that pays more interest without requiring a high minimum deposit. If you opt to use credit cards, consider using one that offers rewards like cash back.

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