With all of the discussion around the recession and protecting your assets, I thought it important to cover the topic of banks vs. credit unions. Many people have an idea of which is better and why, while others think they’re the same. However, it’s important to understand the difference and how they can benefit you.
For profit vs. not-for-profit
First of all, there is a big distinction between banks and credit unions in that a bank is for profit, meaning they operate to make income. Credit Unions, on the other hand, are not-for-profit, meaning any income they earn is given back to the members.
So, how does this benefit you?
Well, look at it this way. The owners of a bank are the stockholders; therefore, a bank’s primary goal is to make their investors money and keep them happy. The way a bank makes most of its money is in fee income - those overdraft fees that everyone hates to pay! There are other fees associated with this income, but the real bread and butter is in the overdraft fees. If you’ve ever had these fees with a bank, by your own fault or not, then you know how difficult it is to get help with them.
I’ve worked for two major banks in my banking career and both of them are very different in their practices, but one thing they have in common is that overdraft fees are RARELY returned and when they are it’s only if the bank has made an error. If you made a mistake, well, we feel sorry for you but there isn’t much we can do. Have to keep the investors happy, see? Now, there are exceptions to the rule, but it really boils down to how much money you have in the bank. Obviously, refunding fees is not to the benefit of those who need it.
Conversely, the owners of a credit union are its members. When you open an account with a credit union, you become a shareholder and part owner of the credit union. Fee income works the same way; however, a credit union uses the income to give back to the members in the form of lower rates on loans and higher dividends for savings and certificate’s of deposit (these are just CDs, but the NCUA is funny about actually calling them CDs). So, a credit union’s primary goal is to keep all of their members happy because all of them make a difference.
I work for a credit union now and I can tell you from personal experience that it is a much better environment. Where before I was told that someone walking in with thousands of dollars was more important than someone with only hundreds (which is ridiculous by the way, we can never presume we know how much money a person actually has), now I’m told that everyone is equally important and should be treated exactly the same way. From a moral standpoint, this just feels better. But, from a consumer standpoint, this is good business.
Many people worry that a credit union isn’t FDIC insured. Well, they’re right, it’s not. A credit union is insured by the National Credit Union Administration (NCUA). They are an independent federal agency that charters federal credit unions and supervises their activities. The NCUA, and by extension the federal government, are still guaranteeing funds to members whose credit union goes under. However, have you ever looked at the statistics for the number of credit unions that have actually gone belly up? The number is significantly less than that of banks. The reason for this is that credit unions prefer not to touch the NCUA fund unless they have no other choice. In other words, it is a very last resort. What usually happens is that surrounding credit unions will try to adopt the failing credit union into their charters so that members are not affected.
Another plus to credit unions is that they don’t try to compete with one another as do the bigger banks; one of the perks to being non-profit. Instead, they work in tandem and form alliances that benefit their respective members. For example, in Austin, Texas there are about seven credit unions that form the Austin Alliance whereby each participating credit union’s members can use any of the other credit union’s ATMs for free. This benefits everyone and it saves the credit unions – and their members – money by not having to install more ATMs. There are many other benefits to this type of an alliance and it really focuses on the needs of the members, not just a select few.
When most people consider the difference between banks and credit unions they think of rates. Historically, credit unions have offered better rates on everything from savings and CDs to loans. Incidentally, I saw a commercial the other day for WaMu with a bunch of actors dancing around because “their interest rates were so low.” I watched the commercial to see what the rate was and had to laugh. The advertised rate was 6.21% for a five year home equity. That’s a great rate? In times where rates are falling so quickly? The credit union I work for is offering 4.99% for five years.
In some cases banks will offer a really good rate on their checking or savings accounts. There are a couple of reasons for this. First, it’s a teaser rate to get people over. Remember, they are for-profit and serve their investors, so the more people they have, the more money they can make. It’s all a numbers game with them. Secondly, banks that need deposits in order to meet their reserve requirements with the Fed will often bump up their rates to attract people. Every financial institution is required to keep a certain amount of money on deposit with the Federal Reserve. If their deposits aren’t meeting that number, then they have to allocate funds from elsewhere, so they will typically bump their rates as a promo to get people in the door.
Credit cards are another area where banks and credit unions differ. As with any other rates, historically, credit unions have been lower. However, not all credit unions offer credit cards because it is fairly expensive to carry a portfolio. If they do offer the credit cards, it is rare that they are handled in house.
There’s been some talk of great rates versus points and rewards with credit cards. It seems like large banks give better rewards, etc. Here’s the thing, it doesn’t matter whether it’s a bank or a credit union that offers the card, there is ALWAYS going to be a trade off for points and rewards over the rate. There are the cards out there that offer the teaser rate and you get rewards, but check out what the rate is after the teaser rate. The difference is in the cost for the company providing the card. If they are giving you free stuff through points and rewards, they recoup a small percentage of their costs through the interest rate. Conversely, if you’re getting a plain Jane card with nothing on it, then the rate is lower because that card still costs less to maintain on the company side – be it a bank or a credit union.
This is largely a matter of perception, but typically you can find more personalized service at a credit union than a bank. Actually, I should clarify this because if you have money with an institution, you’ll get personalized service no matter which route you go. But, think of the last time you walked into a place and everyone knew your name. It’s a good feeling to walk in and have someone know who you are. As I mentioned before, it’s a numbers game to the big banks, so it’s hard to remember everyone that walks through the door. Occasionally you’ll find that rare diamond in the rough that goes beyond the expectation of a large bank, but they are few and far between.
However, if you walk into a credit union the atmosphere is usually different – not always, but usually. For instance, the credit union I work for doesn’t even look like a banking institution. We look more like an internet cafe. The lobby is open, members are welcome to sit and read – we provide books and newspapers – they can watch TV – we provide three different large screens for members to watch – they can bring their laptops in and use the free wifi, and we even offer bottled water and coffee – oh, and free candy! The tellers aren’t tied down to the counter, in fact, we issue laptops so that the employees can mingle and interact with the members. We know our members on a first name basis and it is literally like walking into Cheers because we may be helping someone, but we still look up and say hi. It’s infectious too! The members get to know each other and then everyone is welcoming everyone. That’s different! That’s personal service. I’ve never seen the like at any other financial institution I’ve worked for.
I’m a bit partial to my credit union, but I don’t deny that there are some things that banks are better suited for. Whether you choose a bank or a credit union, knowing the difference can really help meet your needs. And with the economy the way it is, your financial institution will be important.
Get to know who you entrust your money to!