Credit Unions Offer Higher CD APYs

June 17, 2002
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GRAND RAPIDS — The instability of the stock market, along with the questionable accounting practices of some large public companies, has caused a number of investors to deposit their funds in fixed-interest accounts that offer insured safety and a set return.

Certificates of Deposits, or CDs, are one of those investments that have seemingly drawn greater interest from those who are willing to trade growth for income in a lock-box type of setting. And credit unions are offering bigger returns on CDs than banks, especially in the short term.

The Business Journal recently researched the going Annual Percentage Yield (APY) for six-, 12-, 24-, 36- and 48-month CDs from three randomly selected credit unions and banks in the area, and then averaged the APYs for both institutions on each CD.

In every instance, a credit union offered the highest return. Also, the three credit unions averaged a higher APY than the three banks did on all five CDs, although the difference shrinks greatly as the term of the deposit gets longer.

The average APY offered by credit unions was higher than that offered by banks by 1.05 percent for a six-month CD; 1.62 percent for 12 months; 0.92 percent for 24 months; 0.76 percent for 36 months; and 0.27 percent for a 48-month investment.

So what do those APYs mean in real dollars for an investor?

Well, $10,000 deposited in a CD with a credit union instead of a bank would earn an additional $75 over 6 months; $162 over 12 months; $184 over 24 months; $228 over 36 months; and $108 over 48 months.

Those returns, however, do not take into account any fees that may be assigned by the institutions. So the average payout differences may be higher or lower depending on who charges a fee and what amount is charged.

“There is really one basic reason why,” said Linda Schepperly, president of the Michigan Association of Credit Unions (MACU), as to why credit unions offer higher returns on CDs. “Credit unions don’t earn profits.

“They don’t have stockholders that they have to keep happy. So they typically can offer better rates on loans and on savings products — and that’s the reason why,” she added.

Schepperly pointed out that credit unions are also likely to be more flexible with their CDs. She said credit unions offer unusual durations for certificates, such as three- and 30-months, and often require lower deposits to open a CD than banks.

The search conducted by the Business Journal found that an investor could open a CD for $500 at two of the three credit unions, while two of the three banks wanted a minimum deposit of $1,000. In addition, two of the three credit unions offered a 3-month CD, while only one of the banks did.

“You may see a kids CD product for only a $100 deposit. You’ll never see that at a bank,” said Schepperly. “They are just more open to offering more products and services to their members because they don’t have to make a profit.”

But Todd Willoughby, director of communications for the Michigan Bankers Association (MBA), had a different thought on why credit unions offer a higher APY than banks do.

“The banking industry pretty much feels that credit unions have an unfair advantage in that they are not taxed, so that is a source of revenue that the banks need to recapture to be competitive,” he said.

Willoughby added that some banks target the corporate client and the investment side of finance more than the retail market and personal savings.

Banks that do that, he felt, might not offer a higher APY than credit unions because that isn’t their business focus.

“I don’t want to speak for the banks who really are into the retail market and who do focus on consumers.

“However, I would say that as an industry, banking, indeed, is more in tune to business and investment than probably credit unions are,” he said. “And some of that is regulatory. I mean, credit unions were basically created to help individuals.”

MACU is headquartered in Saginaw and is the smaller of the two organizations that represent credit unions in Michigan. The MBA is based in Lansing and has 186 members.

Although credit unions offer a higher APY than banks, that margin narrows when a CD term goes for three and four years. Schepperly said the reason for the smaller difference in the longer term is tied to the money market itself.

“The market is volatile right now. We don’t know what the cost of funds will be out there, so they are a little bit more conservative on what they are paying on those,” she said. “Three years from now, you really don’t know what your cost for funds will be.”

But Willoughby felt the declining APY difference in the longer-termed CDs was more a result of the way credit unions market money than the money market.

“It sounds more like a function of what they’re trying to get in the short-term CDs.”

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