Why you should ditch the big banks and start using Credit Unions

If you found yourself complaining about the “Too Big To Fail Banks” and still have your money at one of the TBTF banks, then you, my friend, have lost the right to complain. If you want to remedy that, or if you simply want better rates, then a credit union is a fantastic almost-perfect substitute for a commercial bank.

The key difference between a credit union and a commercial bank is that the depositors and borrowers of a credit union are its shareholders. With a commercial bank, the shareholders are the owners of its public stock or investors in the corporation. When the credit union counts you as a shareholder, it gives you better rates on your deposits (high yield savings accounts may still offer higher rates) and better rates on your loans. Finally, credit unions are NCUA insured up to $250,000, just like commercial banks and the FDIC, so your money is safe.

The main trade off is that credit unions are smaller and so they lack the enormous geographic footprint of much larger banks.

So how do you find a good credit union? According to the website SimplePayday, credit unions are required by law to limit membership. The membership is generally limited to an association, such as your workplace, or a geographic region, a county or municipality.

Places to look:

• Workplace: If your workplace is large enough, you may be able to find a credit union associated with your job. The credit union may service multiple employers, in order to get membership rolls up, but large employers may have their own. My former employer, Northrop Grumman Corporation, had its own namesake credit union.
• Local Credit Union: Think about the last time you were driving around your local area, did you see any credit union branches? I often pass by a Tower Federal Credit Union, which services several counties in Maryland, and they are one that can offer membership based on where you live.
• Search NCUA: If all else fails, you can use the NCUA’s Find a Credit Union search feature to locate one nearby. You can also use it to confirm that that a credit union is NCUA insured (Tower Federal Credit Union is charter number 8333 and it is Federally Insured).

Credit unions exist to help its members. Commercial banks exist to enrich their shareholders.

You read that right. Credit unions are unions that exist to help its members. That’s why they often have better interest rates on both loans and deposits. Commercial banks are businesses. Their sole purpose is to figure out how to make more money from its customers (you!). Interest rates are often very low (or nonexistent), loan rates are often competitive, and they always try to sell you new products because you are a customer. Credit unions, by law, have to have membership requirements. Credit unions are often tied to a geographic area or particular group, so as long as you qualify you can join. The Pentagon Federal Credit Union is one of the better known credit unions, because of their once mighty CD rates (still competitive if you look 3+ year terms), and if you weren’t active/retired military or worked in defense, you could be eligible to join just by joining the National Military Families Association. So there are membership rules, but there are ways around them and here are ten reasons why you should try to find a way:

1. Better interest rates on loans: At Tower Federal Credit Union, a credit union in Maryland, the current rate on a 60-month loan for a new car starts at 4.75% APR. At Bank of America, the nation’s largest commercial bank, the current rate on a 60-month loan for a new car starts at 4.95% APR.
2. Personal loans are more likely: The prospect of getting a personal loan at a credit union is much higher than at a commercial bank. In a theme that you’ll see repeated in many other reasons, credit union relationships are much stronger and so the likelihood of getting a personal loan is higher as non-financial factors are taken into consideration.
3. Better interest rates on deposits: At TFCU, the regular checking account earns 0.25% APY while the regular checking account at Bank of America earns nothing. While I wouldn’t recommend putting your savings in a checking account, the fact that you can earn something, while your money is waiting to be spent on regular bills, certainly beats earning nothing. The current savings account rate is 1.40% at TFCU versus 0.20% APY at BoA on the Regular Savings Account.
4. Lower fees: There are no minimum balance requirements at TFCU for their checking or savings account. At BoA, you need to keep at least $300 in your savings or have an automatic monthly transfer of $25+ to avoid a $3 fee. If you use a non-TFCU ATM, there’s a $0.75 fee; if you use a non-BoA ATM, that’ll be $2.
5. Fewer customers, better relationships: At a huge bank, you’re an account number. They see so many customers throughout the day that there isn’t really any opportunity to build relationships. At a smaller bank, you have a better chance to forge those relationships with the employees at that bank. Credit unions are often much smaller and naturally more conducive to this.
6. Fewer customers, you’re more important: How many customers does Bank of America have? Let’s say you want to get an erroneous fee removed, do you think it’s easier at your local credit union, where you’re one of a few thousand, or at Bank of America, where you’re one of a few (hundred?) million?
7. No call centers: Credit unions, and other smaller banks, often answer their own phones. Have a problem at a larger bank? You might call in and find yourself talking to someone at a call center. Call centers aren’t all bad though, they often get a bad reputation, but I prefer a bank employee over someone at a phone bank reading off a script.
8. You can be involved at a credit union: Did you know that the Board of Directors at a credit union is comprised of members who volunteer their time, are unpaid, and elected by the union membership? If you don’t like the direction your credit union is going, you have a say in it.
9. NCUA insurance: Just like commercial banks and their FDIC insurance, credit unions are protected with NCUA insurance. NCUA stands for the National Credit Union Administration and the NCUA insurance limits mirror that of the FDIC.
10. Less profit-driven, takes fewer risks: When you are beholden to shareholders and have the pressure to constantly generate bigger profits, you might be tempted to take greater risks. We see the fallout of that mentality today, with banks failing left and right. Credit unions aren’t immune to loan defaults but when you don’t feel the constant pressure to generate profit, you don’t take on those riskier loans. That leaves a healthier financial institution. To date, 25 commercial banks have failed in 2008 (including some of the biggest national banks), only 9 credit unions (with some being very small, like Meriden F.A. Federal Credit Union with ~$337,968 in assets).