Credit Union vs. Commercial Bank CDs

If you are shopping around for a certificate of deposit (CD), there are many options available to you. Hundreds of institutions offer CDs, from your tiny local credit union to huge multinational banks. The good news is that there is no essential difference between the CDs they typically offer—although interest rates can vary substantially from one individual institution to another. In this article, we'll look at how CDs work at both banks and credit unions and help you decide which type of institution is right for you.

Credit Union CDs vs. Commercial Bank CDs

Typical certificates of deposit work the same way, whether they are issued by a commercial bank or a credit union. 

When you take out a CD, you commit to leaving your money in the account for a set period of time. In exchange, the issuer will generally pay you a higher rate of interest than it offers on its standard (and more liquid) savings accounts. If you need to get your money out before the end of the CD's term you will often incur an early-withdrawal penalty, sometimes a substantial one.

CDs are among the safest investments available. One reason is that the bank or credit union guarantees the interest rate it promises you when you sign up. Another is that most CDs are federally insured. The Federal Deposit Insurance Corporation (FDIC) provides insurance for most banks, and the National Credit Union Administration (NCUA) provides it for most credit unions. When you open a CD with an FDIC- or NCUA-insured institution, up to $250,000 of your money on deposit with that institution is protected by the U.S. government, even if that institution were to fail.

Credit Unions vs. Commercial Banks

Though CDs work in the same basic way whether they are issued by banks or credit unions, some people prefer one type of institution over the other. 

There are a number of reasons for this:

• Credit unions tend to have lower fees and better interest rates on savings accounts and loans.
• Banks' mobile apps and online technology tend to be more advanced.
• Banks often have more branches and ATMs nationwide. Some credit unions, however, participate in the Co-op Shared Branch network, which allows their customers to do business at some 5,600 physical locations and more than 30,000 surcharge-free ATMs.
• Credit unions have a reputation for providing more personalized customer service, while large banks tend to have stricter rules and may have less flexibility in decision-making.

When it comes to CDs, the interest rates offered by different institutions are so variable that it's impossible to say that either banks or credit unions offer higher rates. That's why it can be a mistake to just open a CD at the bank or credit union where you already have other accounts without investigating how its rates compare with those you can earn elsewhere.

Before the internet, your CD choices were essentially limited to what you could find in your community. But with the proliferation of online banks—and traditional banks with online portals—the number of CDs you can consider is astounding. For example, Investopedia's list of best bank CD rates is based on about 200 banks that accept customers nationwide.

The Bottom Line

A typical certificate of deposit (CD) works in the same way whether it is issued by a bank or a credit union. Choosing between the two types of financial institutions is largely a matter of personal preference, although it can pay to shop around for a competitive interest rate.