You wouldn’t normally think of credit unions as sexy or hip.
They don’t have glossy ad campaigns and beautiful branches on every street corner. Even their basic definition—non-profit financial co-ops—sounds boring.
But these days, more and more Americans are clamoring to join the club of credit unions because of their low fees, higher interest rates on savings accounts and lower interest rates on loans.
Because they are non-profit, credit unions are the only financial institutions that go out of their way to serve low-income clientele. But you'd be wrong if you think that's the only group they serve. Anyone can benefit from the low-fee, low-rate products that credit unions specialize in. And in fact, many more people are.
After a furor erupted over new debit card fees announced by several commercial banks in September, 650,000 customers have switched to credit unions, depositing $4.5 billion in new accounts. (That's the same amount as existing credit union customers across the country had been depositing in an entire month.) Those bank fees have since been rescinded, but the bad taste in many Americans' mouths remains.
Just take the wildly successful “Bank Transfer Day” on November 5th, organized by Los Angeles small business owner and former Bank of America customer, Kristen Christian. This particular party, to which she at first invited 500 of her friends on Facebook, ballooned to 75,000 RSVPs within a month. On that Saturday, thousands of disgruntled customers closed their accounts at large institutions and sat down with a credit union employee to open an account. It's too early to tell exactly how many people moved their money, but we do know that 54% of credit unions saw growth.
Should you join the party? We spoke with Greg McBride, senior financial analyst at Bankrate.com, to see if credit unions might be a good choice for you.
Why You Should Go With a Credit Union
The Same Basic Financial Services
Credit unions may have different names for their services, like share accounts (savings accounts), share draft accounts (checking accounts) and share term certificates (certificates of deposit), but they work the same way bank accounts by different names do. Credit unions also offer online banking and credit cards. And if you’re worried about finding an ATM when you need it, McBride says, "Many credit unions belong to large surcharge-free ATM alliances that open up thousands of ATMs around the country." These networks have even more ATMs then Bank of America or Chase.
Lower Fees and More Savings
Because credit unions are not-for-profit (unlike banks), they use excess earnings to give their members lower fees, higher rates of return on savings accounts, more affordable loans or new services. Compare the median annual credit card fees for credit cards—$25 at credit unions and $59 at banks—and the median overdraft fee—$6 at credit unions and $10 at banks. And more than three-fourths of credit unions offer no-strings-attached free checking, while only 45% of banks do. As of late September, the average interest on a savings account at a credit union was higher than at a bank: 0.23% over 0.17% for a $1,000 savings account, or 0.28% vs. 0.18% for a $2,500 money market account.
You’re the Boss
Instead of shareholders owning the bank, each member of a credit union owns a piece and gets one vote—regardless of how much money he or she keeps at the union—to elect the Board of Directors. In turn, the Board of Directors decides the interest rates, fees and other practices. So if you don’t like what is going on, you can vote the offending board member out. Plus, having local owners instead of shareholders running the show changes the timbre of service you get. Here’s why.
Better Customer Service
Since "customers" are technically owners, your local credit union will likely get to know you and work with you to meet your needs. All that individual attention means that credit union customers tend to be a pretty satisfied bunch: Almost 90% of credit union clients plan to stay, while only 60% of customers at big banks plan to do so.
Why You Should Think Twice
We are never fans of payday loans, which are personal loans that come with exorbitant interest rates that take advantage of low-income customers and plunge them into a cycle of debt. For the most part, credit unions offer low-cost, financially healthy alternatives paired with counseling. But a few credit unions, 25 to be exact, are doing exactly what they purport to save customers from: handing out loans that charge 300% or more. So, be sure to avoid any credit union that is on this list, and if you must take out a personal loan, don’t agree to one with interest rates above 28% per year or a high “application fee.” A reputable credit union with your interests in mind will offer a loan with an interest rate of around 10%.
Not Always Federally Insured
Bank accounts at both commercial banks and at most credit unions are insured by equally safe government bodies (the Federal Deposit Insurance Corporation, or FDIC, for commercial banks, and the National Credit Union Administration for credit unions). But notice we said "most" credit unions: Watch out for the few state credit unions that have private insurance, because that is not as safe as a government guarantee. For instance, if several credit unions insured by one private company fail at once, that insurer may not be able to cover the deposits (as happened with American Share Insurance in 2009 and 2010). So, make sure your credit union is federally insured. As Bankrate's McBride says, "The presence of federal deposit insurance means the risk of the institution failing is their problem—not your problem."
Late on the Technology Curve
If you're a tech/smartphone junkie, you should know that credit unions tend to adopt tech innovations later than commercial banks. For instance, many of them are still in the process of developing mobile banking services and mobile-phone check depositing. It's not as though they'll never adopt these innovations. They just tend to get to them a bit later. (For example, LearnVest's My Money Center is unable to link every single credit union, though it does support many.)
Unlike a regular bank where you can walk in off the street and open an account, many credit unions have specific requirements. Some are affiliated with the military, some with universities, some with large employers or certain industries and some require that you be part of a certain church or club. Some just ask that you live in a certain town or area. You'll have to do some work to find one you can join, though it should be possible for almost anybody. You can start by searching for a credit union by geographic location or your affiliation to an industry or employer with three websites: NerdWallet.com's Credit Union Finder, aSmarterChoice.org and CULookup.com.
Why You Shouldn't Go With a Credit Union
Find Out More About Credit Unions
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You Tend to Relocate Often
This is only a downside if you want local branch access (and if you're searching for a mortgage or car loan, you likely will): Because many credit unions are affiliated with a location or an employer, if you're young and switch jobs or move before settling down, your credit union will no longer be nearby. (But you can never be kicked out for moving. "Once you’re a member, you’re always a member of a credit union," says McBride.) Signing up with a national bank like Bank of America allows you to move to almost any new city, with the only chore being changing your mailing address online. But if you're a member of a local credit union, move to a new state and want in-person branch access, you'll have to search for a new financial institution and move your account. (Also, some credit unions belong to networks that allow their customers to walk into a partner credit union and use it as if it were their own.)
No Wealth Management Services
"If you are a high-income, high-net worth consumer that needs a lot of personal banking options like private banking services and wealth management, credit unions cannot provide that," says McBride. But for people in need of all the basics—checking account, savings account, car loan and mortgage—a credit union can work just fine.
The Bottom Line
As with any financial decision, the choice you make should be right for you. That means you should be fairly certain before joining a credit union that you won't need the wealth management services that they lack, or that you won't be moving locations anytime soon, or that if you do move, you'll be satisfied with online banking, etc. And vet your options carefully. As noted above, some credit unions are better than others.
Above all, do your homework and figure out whether a credit union or bank better meets your needs, in terms of services, rates and locations. As McBride points out, "Credit unions tend to offer higher rates on deposits and lower rates on loans. So for consumers who are seeking the best deal, credit unions need to be included in your comparison shopping."