Credit

Mint.com Facebook Fan Q&A: Credit Unions or Large Banks — Which are Better for Your Credit?

Banks or Credit Unions - Which is Better for Your Credit?

For the past two weeks, I’ve been answering credit related questions from Mint’s Facebook page– here.

For week #3 I’ll tackle another question, which happens to be one of my favorites…credit unions versus banks, who’s the winner in the credit building game? Enjoy!

Question #5: “Are credit unions a good place to help establish/fix credit?”

Full disclosure: I have accounts with a local credit union and with two national banks. As far as which is a better choice when establishing or rebuilding credit, they’re equal.

A well managed account with a credit union is just as beneficial as a well managed account with a bank. There are, however, some things to consider before you make your choice between the two financial institution types.

Which Credit Reporting Agencies Do They Report To?

Credit unions don’t always report to all three of the national credit reporting agencies; Equifax, Experian and TransUnion.

If you have an account with a credit union and that account is only being reported to Equifax, then your credit file at Experian and TransUnion won’t benefit.

How do you find out if your credit union reports to all three credit bureaus? Ask them!

It’s not national security and it should be fairly easy to learn about their credit reporting practices. Almost all large banks report to all three credit bureaus, as standard practice, so check to see if your credit union does, too.

Credit Builder Loans — Credit Unions

Many credit unions offer what’s referred to as “credit builder loans.” A credit builder loan is a small loan whereby the credit union maintains the money in an interest bearing deposit account while you make monthly payments exhausting the balance.

You may not have access to the money while you’re making payments, but once all payments have been made, the balance is all yours. The same issues apply with respect to credit unions reporting to all three credit bureaus, so ask in advance of taking out this type of loan.

Higher Credit Limits — Large Banks

It’s easier to get a large credit limit with a large bank or credit card issuer than it is to get one with a credit union. While it’s not unheard of, getting a $25,000 credit limit on a credit union issued credit card is atypical. Getting a $25,000 credit limit from a large bank is pretty easy, assuming you’ve got good credit.

This is important because as those of you who have followed my writings on Mint know, I often write about the value of having low revolving utilization and how that can help your credit scores.

Revolving utilization is the relationship between your credit card balances and your credit card limits, expressed as a percentage. The higher that percentage the lower your score is likely to be.

If you have a $2,500 credit limit on a credit card it’s much easier to inadvertently end up with high utilization. Even a modest $1,000 balance means you’re 40% utilized, which is not good.

Now, take that same $1,000 balance charged on a credit card with a $20,000 limit. You’re 5% utilized and your scores aren’t skipping a beat. Same charges, same balance, considerably different score impact.

Credit Union Pros

Where credit unions seem to do better than banks is with checking account fees.

While the issue of disappearing free checking has been overblown, you may find it easier to open a fee free checking account with a credit union than with a large bank. That’s certainly also not a hard and fast rule.

Both of my bank checking accounts have no fees and no minimum deposit requirements and I haven’t had direct deposit for years.

Anyone can open an account with a bank,  but I was always under the impression that you’re supposed to have some sort of affiliation to open an account with a credit union, such as being an employee of the state or Federal government.

Having said that, my credit union’s only membership requirement is that you pay a $5 membership fee and deposit at least $5 into a savings account. I did some research on local Atlanta based credit unions and many of them do not have any sort of affiliation requirement, while some do.

Credit Union Cons

My suggestion is you also consider other benefits of doing business with either a credit union or a large bank. Credit unions don’t normally have the same number of branches as a large bank and credit unions don’t normally have the same sized ATM network either.

If you are considering banking with a credit union, then looking into the proximity of their branches and ATM locations to the areas you frequent is probably going to be time well spent.

You might also find that a large bank has a more complete set of financial services than most credit unions, but interest rates from banks can also be higher than rates offered by credit unions.

These are not hard and fast rules, and it ultimately comes down to which credit union and bank you’re comparing.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.