Should I use a bank or a credit union for my savings account?

Question

I have two checking accounts with a national bank, one which I have a debit card that I use for daily purchases, and one which I use just as a savings account. I leave that debit card stashed away at home for emergencies.

I took a finance class in college and the instructor told me that a lot of credit unions offer savings accounts that offer the ability to earn very high interest rates, as much as 15%. This has me thinking, I should store my money in a credit union savings account with a 15% interest rate instead of in my checking account with my bank which has the typical bank interest rate of something negligible, like 2%.

My questions are:

1. Is this information true?
2. If so, what is the catch?
3. If I can have a savings account at a bank which only offers a 2% interest rate, or I can have a savings account with a credit union that offers a 15% interest rate, why doesn't everybody just use credit unions for savings accounts? That seems like a smart way to go.

Answer 1

Your instructor's numbers do not seem to have any basis in current reality.

At this page you can see a comparison of interest rates offered by banks and credit unions. In the most recent table for June 2014, banks paid an average interest rate of 0.12 percent on savings accounts, while credit unions paid an average of 0.13 percent.

If you look back further, you will see that interest rates paid by banks and credit unions are generally comparable. Credit union rates tend to be a little bit higher, but certainly not 7 times higher.

The last time any financial institution paid as much as 15% on a savings account would probably be the early 1980s. You can see here a historical chart of the "prime rate" for lending. Savings account rates (at either banks or credit unions) would typically be lower.

(This is based on the US, in accordance with your tag. Interest rates in other places, especially developing countries with less stable currencies, can be dramatically different.)

Answer 2

In practical terms, these days, a credit union IS a small "savings and loan" bank -- the kind of bank that used to exist before bankers started making money on everything but writing loans. They aren't always going to offer higher interest and/or cheaper loans than the bank-banks, but they're almost always going to be more pleasant to deal with since they consider the depositors and borrowers their stockholders, not just customers.

There are minor legal differences (different insurance fund, for example), and you aren't necessarily eligible to open an account at a randomly-chosen credit union (depending on how they've defined the community they're serving), but they will rarely affect you as an account holder.

The main downside of credit unions is that, like other small local banks, they will only have a few branches, usually within a limited geographic area. However, I've been using a credit union 200 miles away (and across two state lines on that route, one if I take a large detour) for decades now, and I've found that between bank-by-mail, bank-by-internet, ATM machines, and the "branch exchange" program (which lets you use branches of participating credit unions as if they were branches of your own) I really haven't felt a need to get to the branch.

I did find that, due to network limitations of $50K/CU/day, drawing $200,000 worth of bank checks on a single day (when I purchased the house) required running around to four separate branch-exchange credit unions. But that's a weird situation where I was having trouble beating the actual numbers out of the real estate agents until a few days before the sale. And they may have relaxed those limitations since... though if I had to do it again, I'd consider taking a scenic drive to hit an actual branch of my own credit union.

If you have the opportunity to join a credit union, I recommend doing so. Even if you don't wind up using it for your "main" accounts, they're likely to be people you want to talk to when you're shopping for a loan.