Are Credit Unions a Safe Way to Earn a Higher Yield?

Question: I'm not earning anything via my checking and savings accounts at my bank. I've been reading about how I may be able to earn a higher yield on my money in a credit union. But how can credit unions offer higher yields, and is my money as safe in a credit union as it is in the bank?

Answer: Credit unions are nonprofit financial institutions owned and controlled by their members. This is in contrast with traditional banks and other financial institutions, which are designed to maximize profits for their shareholders.

The beneficial side effect of a credit union's ownership structure is that the institution doesn't have to deliver a slice of profits to shareholders. That, in turn, can enable credit unions to pay higher interest rates on deposits than is the case with for-profit financial institutions, and they may also be able to loan money and offer credit cards at more attractive rates than competing for-profit firms. The fact that credit unions typically conduct no marketing also helps them deliver attractive rates to consumers. Making direct comparisons can be tricky, but short-term savings vehicles held at a credit union may yield as much as 0.25% or 0.50% than the same investment type held in a bank.

Money held in a credit union isn't FDIC-insured, but assets in a federally insured credit union are insured by another entity, the National Credit Union Administration. (Click on the "For Consumers" tab on the NCUA website.) The NCUA, like FDIC, is backed by the full faith and credit of the U.S. government, and the protections are generally the same for money held at NCUA-covered institutions as they are for assets at FDIC-protected entities: $250,000 per depositor per institution. (The amount of assets insured by FDIC and NCUA was boosted during the financial crisis; those heightened limits will remain in effect through 2013.) The NCUA, like the FDIC, provides a tool to help you determine whether your assets are insured.

So if credit unions offer higher yields on savings, lower rates on loans and credit cards, and equal protections on assets, what's the catch?

For starters, though banks are ubiquitous, you may have to do a little hunting to identify a credit union to join. It's not hard to find "credit union locator" tools online, but bringing up a list of credit unions in your Zip code doesn't mean you'll be able to join one of them. Searching on credit unions within 10 miles of my own home Zip code using this tool, for example, brought up a bewildering array of credit unions geared toward airline pilots, firefighters, and other organizations to which I have no connection. So with no easy gateway to finding credit unions to join, your best hope is word of mouth: Ask around to determine if your employer or your spouse's employer offers a credit union, or perhaps you can locate one via your church or geographic community. And even if it looks like you may not be able to join a certain credit union, it never hurts to ask.

In addition to the cumbersome process of locating a credit union, one other drawback is that credit unions may be light on amenities that bank customers can readily avail themselves of, such as multiple physical bank branches, ATMs, and safety-deposit boxes. Some credit unions allow their members to use an ATM free of surcharges as long as they stick with certain locations, and those networks can be quite expansive. But if you can't join a credit union that's part of a broad network, that's an argument for finding one that's in close geographic proximity to your home and/or offers a robust product for online banking.

Finally, a word about expectations. Yes, a credit union may be able to offer an appreciable bump-up, in percentage terms, versus what you could earn in a savings vehicle held at a traditional financial institution. But with rates as low as they are, the higher yield you earn may not translate into a significantly higher payout in dollar terms, at least not right now, unless you have a lot of money parked in cash. For that reason, those with smaller amounts to save should carefully mull whether the time needed to make the switch to a credit union warrants the reward. Credit unions have a lot going for them, but they can't create miracles.

A version of this article was published April 13, 2010.

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