Credit Unions vs Banks

Credit Unions vs Banks

In the fall of 2008, we witnessed a particularly tumultuous time in the world of finance and in many people’s eyes, this was brought on mostly by the greed and complacency of the big banks.

These institutions have become so big and powerful, and regulation simply doesn’t appear to work with them (either because the bodies who are required to regulate turn a blind eye when things are going well, or because the financial system is so complicated that it’s nigh on impossible to predict the outcome of all possible actions). The big banks and their heads have taken a big blow to credibility since the collapse – public opinion is such that the banks are at fault, yet the responsibility to pick up the pieces falls on the governments and the tax payer.

It used to be that the local bank manager was one of the most respected people in the local community, along with doctors, teachers, and the like; but now that image is all but behind us, with bank managers being seen as fat cats taking all they can yet still asking for hand outs when everything goes wrong.

The reality is far more complicated of course, but public opinion is a powerful thing. Credit Unions have of course been around long before the collapse of 2008, however recent times have seen more and more people moving their money out of the banks and into Credit Unions. To illustrate this point, the share of total deposits in the US that credit unions held — grew from 9 to 10 percent in 2009 – 2010, whereas the growth from 8 to 9 percent took 14 years [http://www.huffingtonpost.com/stacy-mitchell/credit-unions-hang-tough_b_621081.html].

Credit Unions are often said to offer lower fees, higher interest rates, better service, while also being community oriented. So are there any reasons not to open an account with a credit union?

The difference between Credit Unions and Big banks

A credit union is a financial co-operative

Banks are instutions [what kind exactly] whose primary motivation is profit and growth, whereas a credit union is a financial co-operative. This means that account holders are members and joint owners, board members are elected democratically with all members getting one vote regardless of account size.

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Not for profit

Big banks are obviously a for profit organization, whereas credit unions, however, are ‘not for profit’. Not for profit differs slightly from non profit (as a charity or similar organization would be classed) in that a not for profit organization is allowed a modest profit in order to stay liquid. Profits however are either invested back into the credit union, or given to the members as a dividend. The implications of having a not for profit status allows them to operate without paying federal or corporate taxes. Not paying taxes obviously reduces their costs and enables them to be more competitive.

Membership to credit unions is a bit more exclusive

Normally, not just anybody can join a credit union. Membership is usually restricted based on location, employment, or membership to some association or organization such as place of worship or college. Additional to this is that only members can deposit or borrow money with a credit union, so for example it’s impossible to get a mortgage with a particular credit union if you are unable to become a member. This fact helps to engender the community spirited aspect of credit unions.

What happens if my credit union goes bankrupt?

Bank deposits are insured in case of bankruptcy (and we’ve all seen how possible it is for the largest banks to fail recently) by the FDIC, the standard insurance is for $250,000 [http://www.fdic.gov/deposit/deposits/insured/basics.html]. Credit unions also carry insurance against bankruptcy, they are insured by NCUA, and again the standard insurance is $250,000 [http://www.ncua.gov/legal/guidesetc/guidesmanuals/ncuayourinsuredfunds.pdf]. So they’re largely equivalent in this respect.

What are the practical differences between credit unions and banks?

All this so far has gone through the things that make a credit union different to a bank, but if you were to move your money to a credit union, what are the practical differences with day to day use that you’re likely to encounter?

Credit unions in general have lower fees

A recent report by Moebs Services has reported that median overdraft fees at credit unions have been rising, and now stand at $28 (as of July 2013), this is up from $25 in 2011. However this still compares favorably with banks, whose median overdraft fees stand at $30. Credit unions also offer a higher percentage of free checking accounts than big banks – a recent report by bankrate.com shows that 72% of credit union checking accounts are free, this is down from 78% in 2010, whereas only 39% of checking accounts with banks are free, down from 65% in 2010 – a drop of a rather astonishing 26%.

Credit unions have higher customer service ratings

Credit unions have a consistently higher customer services ratings than banks, although as credit union size grows, the gap is closing here too. The most recent ACSI (American Customer Satisfaction Index) report for credit unions and banks puts banks at a rating of 77, a rise of 2.7% since the previous year. Customer satisfaction for credit unions fell 5.7%, but still came in at an 82 ACSI score.

ATM usage

Credit unions are usually small local organizations, so how does that affect ATM usage, especially if you go out of state? Well to counteract the fact that a credit union will not have ATMs across the country, they in general offer to refund out of network ATM usage, limited usually to around $15. The details will differ from one credit union to another however so it’s necessary to check the specifics before opening an account with a credit union. Banks of course will have ATMs nationwide, but will not normally offer to refund out of network ATM usage.

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Are there any downsides?

It is fairly commonplace for loans with credit unions will include a cross-collateralization clause. Cross-collateralization is where collateral for one loan is used as collateral against another loan, this can turn what would normally be an unsecured loan with a bank into a secured loan. For example a credit card is normally unsecured in that you need no collateral, however with a credit union if you take out a credit card with a cross-collateralization clause, and you subsequently take out a secured loan to buy a new car, the car can be used as collateral against your credit card debt. The downside of this is that if you settle the auto loan, the car is still collateral against your credit card, and so could still potentially be repossessed if for some reason you are not able to settle the credit card debt.

Conclusion

If you’re considering moving your money from a bank to a credit union, you should see slightly lower fees for similar services, and you shouldn’t see much difference in the day to day use. You will however be supporting a more local or community driven organization rather than a large profit driven company. If this is important to you then you will probably feel better about switching, and won’t see any real downsides. If it isn’t important to you, then there isn’t much to choose between the two.