Master Your Card

The fall of IndyMac Bank makes the sixth bank this year to go under. People are rightfully concerned about their money and I’ve gotten an influx of questions from members about protecting their money. So, let’s revisit how to protect your money with financial institutions.

First and foremost, if your bank or credit union is not FDIC or NCUA insured, dump them. You’re not protected and if they go belly up, you will probably lose your money. FDIC insurance covers banks and NCUA insurance covers credit unions.

Now, there’s an important distinction that needs to be made here. I had a member come in today wanting to pull all of her money from the credit union because a bank told her that credit unions were no good since they weren’t FDIC insured. That was a pretty underhanded tactic for the bank to use because, technically, we’re not FDIC insured and most people are more familiar with FDIC. HOWEVER, we are NCUA insured, which is arguably a stronger fund anyway.

There are three main reasons that NCUA is typically a stronger fund than FDIC.

1.) Credit unions contribute more than the minimum required to the fund.

2.) Credit unions have not had to dip into the fund for almost forty years – banks have dipped into the FDIC fund 6 times this year already.

3.) Banks will often shortchange their contributions to the fund when working on acquisitions or mergers.

The reason credit unions haven’t had to dip into their funds is because when a credit union reaches the point of closing its doors, other credit unions in the area will adopt them into their charters so that it’s not a “closure” per se. It becomes an acquisition of the failing credit union.

But, the point of this post isn’t which is better than the other. The point is, both insurances serve their purpose and they’re important to consumers. If you’re not at an institution that is covered by one of these two, you need to be.

Both FDIC and NCUA cover individual accounts up to $100,000 and retirement accounts up to $250,000. Now, there are different ways that your financial institution can style your accounts which can increase the protection. For a more detailed breakdown of these stylings, check out our post on insurance coverage.

However, you can also ensure that you’re protected by dividing your accounts up amongst different financial institutions. For example, if you have $350,000 and you’re not interested in trying to keep up with account styles and what not, you can divide that money up between four different financial institutions to cover yourself. The likelihood that all four will collapse at the same time is slim to none, and if it ever did happen, we’d have some serious problems on our hands. But, just like you would diversify your investment portfolio to help alleviate some risk, by spreading money out between several banks, you avoid losing money that isn’t insured.

Something else to consider is what your financial institution is invested in. For instance, if their portfolio is primarily in subprime lending – as a huge portion of IndyMac’s was, then it’s probably a good idea to move your money. Lenders invested in this particular piece of the pie are struggling, plain and simple. But, overall, you don’t want a financial institution that’s dealing heavily in one thing as it’s risky. Do some research and find an institution with a well-balanced portfolio.

In terms of big banks Chase, Bank of America, and Citifinancial are pretty stable. While Chase reported a loss this quarter, they still beat Wall Street expectations and a large part of their loss had a lot to do with buying Bear Stearns and taking on the employees. They’ll probably recoup that in the next quarter. In terms of credit unions, that’s a more difficult aspect for me to just list as most credit unions aren’t national. I can tell you the ones in Texas that are doing well; however, that may not help many of you guys. You’ll have to do a little research on your own for those.

So to recap, get thee to an FDIC or NCUA insured financial institution – if you’re not already – and make sure you’re diversified if you can’t get the accounts styled to increase your insurance. For those of you with credit unions, please don’t feel like you must rush out and move your money to a bank. Banks will tell you that because it’s a competition thing between the two. It’s an unfair assessment for reasons I’ve listed above. Finally, pay attention to the areas that your financial institution focuses on – for example, subprime lending. If a bank or credit union are heavy in one specific area and not well balanced, they are open to a fair amount of risk – which means you are too.

Does anyone have questions about their situation? It’s important to me that everyone is protected, so feel free to let me know. If you’re not comfortable with leaving a comment, send us an email and I’ll get back to you privately.

But, as a whole, let’s discuss this. Are you pretty comfortable with your financial institution’s strength? What about their areas of saturation?