Christmas Club Accounts: Are They Worth It?

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We're not yet to Halloween and, yes, we're going to talk about Christmas shopping. During the 2014 holiday season, a poll found that families with children planned to spend $578.10 on gifts. But, when you add up additional gifts, decorations, and miscellaneous purchases, the estimated average total for holiday spending is over $1,200, depending on location.

If you're thinking of paying that holiday tab with credit, one great way to curb that debt is to start saving for those expenses today by leveraging a Christmas club account. Let's review what Christmas club accounts are, their advantages and disadvantages, and other criteria to evaluate whether they're suitable for your holiday shopping needs.

What Are Christmas Club Accounts?

First offered by several U.S. banks during the Great Depression, these short-term savings accounts encourage account holders to make regular deposits that accumulate interest and provide access to the funds only at a predetermined date (usually December 1st).

Through the years, there have been many versions of Christmas club accounts. However, they all share one key feature: Withdraw your money earlier than the set date, and you'll not only lose all earned interest, but also receive a hefty penalty.

Christmas club accounts enjoyed their height of popularity in the 1970s, but nowadays they are not as common. You're most likely to find these type of savings accounts in credits unions, because about 72% of these financial institutions offer them, according to the Credit Union National Association (CUNA). (See also: 9 Good Reasons to Choose a Credit Union Instead of a Bank)

Advantages of Christmas Club Accounts

First, let's take at the benefits of these savings accounts.

Higher APY Than Regular Savings Accounts

As of September 6, 2016, the national average APY of savings accounts for deposits under $100,000 is a measly 0.06%, according to data from the Federal Deposit Insurance Corporation (FDIC). Christmas club accounts easily defeat that APY. For example, in Honolulu, Hawaii I can find two credit unions offering Christmas club APYs of 0.40% and 0.50%.

Shorter Holding Period

To get a comparable APY at a credit union, you would need to look for a certificate of deposit with a maturity ranging from six to 23 months. At the credit union offering a Christmas Club APY of 0.50%, you would need to deposit a minimum of $500 for at least six months and 12 months to gain an APY of 0.30% and 0.75%, respectively. With a Christmas club account requiring no minimum balance to earn interest, you have immediate access to an APY of 0.50% at the same financial institution.

Forced Savings

A Christmas club can be a good choice to create a barrier between your bad spending habits and your money. The threat of losing all accumulated interest and paying a big penalty fee can be strong deterrents to prevent you from putting your hands in the cookie jar.

Covered Up to $250,000 by NCUA

While the FDIC doesn't cover credit unions, the National Credit Union Administration (NCUA) insures deposits in federally chartered credit unions and those with headquarters in Arkansas, Delaware, South Dakota, Wyoming, or the District of Columbia. A Christmas club account in a qualifying credit union is covered by up to $250,000 by the NCUA.

Disadvantages of Christmas Club Accounts

Of course, Christmas club accounts do have some drawbacks.

Even Higher Savings APYs Are Available

While a 0.40% or 0.50 APY is good, a 0.75% APY is better. That is the current savings rate offered by the Capital One 360 Savings Account. If you're willing to enroll in online banking, you'll have access to higher APYs than those from Christmas club accounts. (See also: 5 Best Online Savings Accounts)

(Note about other forms of savings: While you could save money also through an investment account, we are sticking to comparable financial vehicles that won't trigger taxes or investment fees, such as front-end and back-end load fees.)

Required Purchase of Shares

Unlike banks, credit unions have owners. To open a Christmas club account in a credit union, you'll need to make a separate deposit, usually $100, in a regular savings account from the same financial institution. You'll still retain ownership and gain interest on that deposit, but you won't be able to access it for a predetermined period. This is not a fee at all, but it may feel like one for some savers.

Limit to Savings

Christmas clubs often have a limit on how much you can earn interest at the higher savings rate. For example, the Christmas club offering a 0.50% APY only applies that rate to the first $5,000. Any balances exceeding $5,000 revert to the lower APY from the regular savings account (0.20%). One easy way to get around that limit is to have another member of your household open a separate Christmas club account. However, you'll need a willing family member who is eligible to become a credit union member.

Keep an Eye on Distribution Dates

Christmas clubs set different dates for the distribution of funds. The Christmas club with the 0.40% APY distributes funds on October 1st, and the one with the 0.50% APY distributes funds on November 1st. Choose a distribution date that allows you to maximize savings for this holiday season.

The Bottom Line: Are Christmas Club Accounts Worth It?

A Christmas club account can be useful way to reach your financial goal if you:

• Are looking to build up a holiday shopping fund between $500 and $1,200;
   
• Are just starting to save now for the current holiday season;
   
• Need a way to force you to save;
   
• Prefer to do business with a local financial institution; and
   
• Have about $100 that you can set aside for at least a year (unless you're already a credit union customer).

On the other hand, you may be better off with another type of savings account, if you:

• Have a savings target well above $5,000;
   
• Are comfortable with banking online;
   
• Require "just-in-case" access to deposits without penalty;
   
• Have access to a savings account with an APY that beats that of Christmas clubs in your area; or
   
• Are only eligible to Christmas club accounts with a very early distribution date.

How are you planning to pay for your holiday shopping?