How To

Bank or Credit Union? You Decide

photo: edenpictures

Banks seem to have a bad reputation don’t they? They charge you for every type of service imaginable. Labeled as profit mongers who invent outrageous fees and give mediocre customer service, banks have not made a good impression on consumers. As a result, many of us end up looking for alternatives.

One option: a credit union.

What is a credit union?

Credit unions are not-for-profit cooperative financial institutions that are owned and controlled by their members. A credit union is democratically governed, each member has one vote, members elect the board of directors and the union is volunteer-based. Unlike a bank where customers are just that, customers – in a credit union, members are also owners.

The average cost to purchase a credit union share is $5 – $10 and typically just a few shares are required for you to open an account. (Those shares are then deposited in your savings account. If a credit union requires you to purchase at least five shares at $5 each to become a member, that means you need to make an initial $25 deposit that will then remain in your account as long as you are a member.)

The profits credit unions make are passed onto members in the form of dividends or lower fees. That is why credit unions typically offer higher rates on savings, lower fees and lower rates on loans than banks. They also offer online banking, ATM’s with no surcharge and overdraft protection, but credit unions offer financial education and counseling without giving potential customers a hard sell on their products.They focus more on service and less on profitability.

A little bit of history

According to the National Credit Union Administration, credit unions first appeared in Germany in the mid 1800’s in the form of financial cooperatives. German farmers, devastated by the crop failure and famine of 1846, decided to organize a cooperatively-owned mill and bakery that sold bread to its members at a discount.This idea developed into addressing the credit needs of farmers. In 1850, the first cooperative credit society, known as the “people’s bank” was initiated.

In the 1920’s credit unions became popular, especially with the working class. Commercial banks and savings institutions were not providing consumer credit, creating a growing interest in the affordable credit unions. Credit unions provided a much-needed source for inexpensive credit. Fast forward to today, credit unions have become increasingly popular throughout the United States. According to NCUA, currently there are about 7, 950 active federally insured credit unions with almost 90 million members and $679 billion in deposits.

Membership

One big difference between banks and credit unions is that while pretty much anyone could become a bank’s customer, you actually need to qualify for membership in a credit union. Credit unions use a variety of criteria to determine eligibility. Employers who sponsor their own credit unions allow employees to join, for example. If you are a member of a church group, school, labor union, or homeowners association, you might also be able to participate in a credit union. Credit unions also serve people who live in certain geographic locations.

Several credit unions are not exclusive at all. Consumers Credit Union (CCU) is open to everyone; it is one of the largest credit unions in Illinois. CCU offers checking accounts, debit and credit cards, vehicle loans, consumer loans, savings, money market accounts, certificates of deposit and mortgage products plus regular, jumbo and IRA plus vehicle loans.

Insurance

Banks have the FDIC to insure consumer’s deposits; Credit unions have the National Credit Union Share Insurance Fund. The National Credit Union Share Insurance Fund (NCUSIF), which is managed by NCUA, is a government-backed insurance fund. Deposits are insured by the NCUSIF up to $250,000 per depositor and backed by the full faith and credit of the United States Government.

Compare before you sign up

When comparing credit unions to banks, follow the steps below to find the institution that best fits your financial needs:

* Find out what products and services each institution offers. Generally, banks offer a more varied selection of financial products and services than credit unions.

* How important is customer service to you? Credit unions are often smaller, have less employees and less customers, so the customer service experience at a CU might be different than the one you get at a large bank with millions of customers and a call center overseas. At the same time, if having access to a branch in multiple locations is your priority, you may be better off at a large bank.

* Do you need to borrow? Loan rates tend to be lower at credit unions, so if you are in the market for a loan, a credit union loan might be your best bet.

* Find out how much interest you will gain on your savings account, or deposit accounts as some credit unions call them. Both banks and credit unions offer checking accounts, savings accounts and CD’s, though you could expect to find higher rates at credit unions.

* What fees and penalties, if any, can the credit union charge? How do these compare to the bank’s?

Still can’t decide? Don’t fret: you can have both. There’s nothing wrong with spreading yourself out to get the most for your money!