By now, most people have the general idea that big banking is mostly for convenience. There is literally a Wells Fargo or Bank of America every 10 blocks. At a time when banks are making record profits and customers are paying higher fees, many people are seeking financial institutions that will help them save money. One such institution could be your local credit union.
Credit unions offer numerous financial products that help people maximize their incomes and increase their savings, often with fewer or lower fees than traditional banks. But these institutions also have disadvantages which may make them unappealing to some banking customers.
One key difference is that a credit union is a not-for-profit institution. Since credit unions operate as nonprofits, they can offer higher interest rates on savings accounts and CDs, and lower interest rates on loan products and credit cards. Credit unions are member-focused institutions. A credit union is a cooperative, which means it is owned and operated by its members, as opposed to being owned by its stockholders like a bank. Your initial membership deposit makes you a part-owner of the credit union and gives you a say in the credit union’s decisions.
With traditional banks, the management and board of directors want to make as large a profit as possible. Unfortunately, this goal often contradicts the goals of its customers, who want to enjoy low rates, fees, and the best customer service possible. In order to provide this level of service, banks must cut into their profits, which they’re not inclined to do.
However, due to the unique membership structure of a credit union, all members have an equal vote in any decisions made by the credit union, and they all work to serve one another. In other words, member goals aren’t at odds with “management.” Therefore, the credit union has more incentive to provide low rates, fees, and great customer service.
Your ability to open an account may be another significant difference between banks and credit unions.
To keep their tax-favored status, credit unions are required to limit their customer base to a group of people who share a common bond (known as the “field of membership”).
That requirement is relatively easy to meet. You may be eligible to join a credit union because of:
- Where you work or the industry you work in
- Where you attend school or worship
- The geographic area you live in
- Membership in an organization, which you may be able to satisfy online
- A family member’s eligibility
Wherever you are, there’s a good chance that there’s a credit union nearby that you’re eligible for. Some credit unions even serve members remotely or with online-only accounts.
I will post a comprehensive list of 2nd Chance Banks and Credit Unions before the month is over. Let me know if you have had any successful experiences in the comments.
The most important question is the security of your funds. Banks and credit unions can both keep your money safe. If an institution goes under, some or all of your money may be insured, meaning these funds will be replaced. In most cases, your account ends up at a new institution, and you have the same account number and account balance as before.
The safest insurance available comes from the U.S. government.
- For bank accounts, the FDIC insures funds with government backing.
- At federally insured credit unions, NCUSIF coverage protects you with the full faith and credit of the U.S. government.
Under current law, both FDIC and NCUSIF coverage protect up to $250,000 per depositor per institution. If you have more than that, you need to make sure to spread your funds among different account registrations or different institutions. It’s possible to have more than $250,000 insured in one place. For example, your retirement account and your individual checking account at the same institution might be counted separately.
Some credit unions are state-chartered (instead of federally chartered), and they offer private insurance coverage. While this protection is helpful in many cases, private insurance is not nearly as safe as NCUSIF coverage.