Credit Unions

Credit unions are nonprofit organizations that have 2 goals — to provide easy-to-obtain services at a cheaper price, and to spread the proceeds of the organization among its members. The members are people who participate in the credit union — its customers.

A credit union is a cooperative controlled by members, who are represented by a board of directors. As a member of a credit union, you are considered an owner, giving you the right to both vote and run for board positions. Credit unions operate with a mantra of “one member, one vote” — regardless of financial assets. Board members receive no compensation for service.

This differs from how banks work. Banks are for-profit companies or partnerships whose goal is to make money for stockholders. Credit union profits are continuously reinvested, which allows the organization to offer lower interest rates on loans. Because credit unions are not-for-profit, they are also exempt from most state and federal taxes.

Credit unions are carefully regulated. The National Credit Union Administration (or NCUA) is an independent federal organization that insures members’ savings and regulates how credit unions operate. The NCUA issues annual grades to each credit union. It serves as a yearly assessment of a credit union’s fiscal health and management. The NCUA works much like the Federal Deposit Insurance Corporation (or FDIC) does for banks and insures deposits up to $250,000.

Principles for Credit Unions

Credit unions operate under a set of seven principles adopted in 1995 by the International Cooperative Alliance. The principles are based on a commitment to serving members and their communities.

  • Voluntary Membership – Credit unions membership is open to anyone. Credit unions will not allow discrimination based on gender, social, racial, political or religious affiliations.
  • Democratic Member Control – Credit unions are owned and controlled by members. Each member has a vote for electing a Board of Directors that sets policies, but each member also is invited to offer input on all decisions made.
  • Members’ Economic Participation – Members contribute and control the capital in the cooperative. The more money contributed by members, the more services the credit union can provide. This is why service fees and interest rates can be so low.
  • Autonomy and Independence – Cooperatives are autonomous, self-supported organizations controlled by members.
  • Education, Training and Information – Credit unions stress the importance of education opportunities for their volunteer directors and financial education for members, the public and especially youth. They offer classes and advice for budgeting, retirement planning and other financial opportunities to improve the financial literacy in their communities.
  • Cooperation Among Cooperatives – Members are best served when cooperatives work together. The CO-OP Network gives ATM users access to thousands of ATM machines with no surcharge fee.
  • Concern for Community – Cooperatives should focus on members, but also develop policies that sustain the development of communities, including people with modest means. Concern for the community and volunteering to solve problems is part of being a member of a credit union.
There are several types of credit unions. Each is defined by its field of membership. Not everyone is eligible for every type of credit union.
  • Local Credit Unions –Also known as community credit unions, local credit unions exist to serve a specific resident — of a city, county or area. Typically all that is required to join is residence within a defined region.
  • College Credit Unions – More than 120 universities and colleges have credit unions for students, alumni, staff and faculty. Special care is directed toward making services affordable for students.
  • Group Credit Unions –These typically serve churches or other small fraternal organizations. Group credit unions usually limit membership to a specific group, like those supporting social and environmental causes.
  • Employer Credit Unions –Like group credit unions, employer credit unions serve a specific company, profession or industry. Teachers, firefighters, postal employees, media employees and workers for a specific government agency may have their own credit union.
  • Military Credit Unions – Some credit unions address unique needs, especially regarding services like checking, mortgages and loans for veterans and military members. The bonus is that you don’t have to be a member of the military to join.
  • Federal Credit Unions – These are national credit unions with only a few membership restrictions. Generally, they require a member to be at least 18 years old and a U.S. citizen.

Benefits of Credit Unions

Most credit unions offer the same services and products as banks, such as mortgages, lines of credit, checking and savings accounts, auto loans and the convenience of electronic banking and Automated Teller Machines (ATMs). Some larger credit unions even sell stocks and offer safe deposit box rentals.

However, a credit union stands apart from traditional banks because it often can provide additional benefits to its members.

Here are some potential benefits of credit unions:
  • Lower Banking Fees – Most credit unions offer lower fees on basic transactions, from ATM withdrawals to overdraft charges. Many offer free checking as well.
  • Lower Balance Requirement – Many credit unions require an account balance of only $5–10.
  • More Competitive Credit Card, Loan and Savings Rates – According to the National Association of Federal Credit Unions, a typical interest rate of a credit union credit card is 11.61. On the other hand, at banks, the average credit card interest is 12.59%. Over time, such a variance makes a significant difference in payments and interest charged. A 60-month auto loan at credit unions in 2015 was 2.70% as compared to 4.72% at banks.
  • Less-Stringent Loan Qualifications – If you have a good credit history, you may have a better chance of securing a personal loan at a credit union, as they are in a better position to lend. Some credit unions also may be willing to work with you if you have a low credit score or extenuating circumstances, such as being self-employed or having a bankruptcy on your record.
  • Better Customer Service – Credit unions often outperform banks in customer service, giving members more time at the counter and more individual attention. This is particularly important in lending, where tough, impersonal lenders and aggressive actions can lead to a lot of stress and fear on the part of the borrower.

Disadvantages of Credit Unions

Credit unions are an attractive alternative to traditional banking, but it’s not a pretty picture in all areas. Like every institution, there are some drawbacks to consider before joining.

Here are some potential disadvantages of credit unions:
  • Can You Join? – The Federal Credit Union Act of 1934 says that credit unions must have a defined membership. Thus, most credit unions are affiliated with a specific region, business, religious or fraternal organization. If you don’t live in that area, or belong to that group, you may not qualify to join.
  • Limited Services – Credit unions offer most of the same services as banks, but they don’t have as much variety. For example, most local credit unions have 2 choices for checking accounts, 3 for savings and 3 for investment. This pales in comparison to what the typical bank offers.
  • Inconvenience – There aren’t a lot of credit unions in operation, and the number is declining. There were 6,424 in 2015 — down 311 from the year before. Most have only one location in a city, so using it for something as simple as deposits or cashing a check can be a hassle.
  • Access to ATMs – Not all credit unions offer ATMs. Couple that with limited branches and access becomes a real problem. About half of the country’s 6,424 credit unions belong to a CO-OP ATM network . But you have to find one first in order to use it at all.
  • Technology Lagging – Some of the middle-size and most of the small-size credit unions can’t meet the demand for mobile banking and online services. Millennials want to check balances, pay bills, transfer funds, apply for credit cards and make deposits using their smart phones. Smaller credit unions may not have the resources to meet those demands.
  • Rewards Programs – Credit cards are becoming a large part of credit union business, but CU’s are slow to adopt reward programs that go along with most bank cards. Only 19% of all credit union credit cards have cash-back benefits.

Credit Unions & Student Loans

Dozens of credit unions across the country are part of the Credit Union Student Choice program, which offers student loans to undergraduate students.

Rates for student loans through credit unions can be considerably lower than what you can expect at a bank. Credit unions are more likely to work with if you have a poor credit history or do not have a co-signer. However, credit unions’ rates are likely to be higher, than those for federally subsidized student loans.

If you plan on taking out a student loan with a credit union, you will be required to become a member of that institution. That means you will have to meet the criteria for membership, which could be the connection to the university you plan to enroll in as a student. You may have to pay a fee to become a member, which can range from $5 to $50.

A credit union may ask you to set up a checking account and make deposits at the institution before it can move forward with a student loan. Your credit score likely will be checked when you apply.

The majority of credit unions won’t make you start paying off the loan until you graduate. But once the grace period ends, credit unions usually have strict repayment terms. That may leave you with less flexibility in paying off the loans.

Credit Unions & Mortgages

The Great Recession of 2008 tore a gaping hole in the mortgage lending industry, and credit unions are helping fill it. Credit unions accounted for an 11% market share of the industry in 2015, 4% higher than just two years earlier, and their share is expected to continue growing.

Credit unions historically have had less capital available for lending than big banks so they stayed away from this part of the borrowing industry for a long time. However, when big banks failed to serve their customers, the landscape of the mortgage lending industry changed, and credit unions jumped in.

More than 65% of the nation’s credit unions offer primary mortgages. Because credit unions are non-profit organizations, they are more likely to offer low-interest borrowing rates than the for-profit banking industry. For example, in January of 2016, the NASA Federal Credit Union was offering 30-year fixed rates of 3.76% on conventional mortgages, while Wells Fargo Bank was offering the same loan at a fixed rate of 4.06%.

The credit unions also offer incentives like zero-down payments, no private mortgage insurance premiums, 100% financing and even a 20% cash-refund on real estate commissions to sweeten the deal. Credit unions usually hold the mortgage for the life of the loan instead of selling it many times, which is common among banks.

Credit Unions & Debt Consolidation Plans

Credit unions might be just the place to go if you are overwhelmed by the number of credit payments you’re trying to make every month, and you need a debt consolidation plan to keep your head above water.

A debt consolidation plan is designed to combine all your bills into one payment that you can afford. It could happen through a debt management program, a debt consolidation loan, or a plan to settle your debts — depending on the amount of debt and amount of income you have available.

Contact your credit union and see if they have a credit counseling department, or if they could recommend one to get you started on the right debt consolidation plan, with the goal of eliminating your debt in 3–5 years.

Choosing a Credit Union

If you think a credit union will give you a better banking experience, do some research on your own to find one you qualify for that also suits your needs. There were 6,424 credit unions in the U.S. in 2015, at least 60 of which support nationwide membership. They aren’t always accessible, but they are available for those willing to do a little work.

Joining one can be as simple as living in a certain city, belonging to a specific organization or paying an annual membership (usually between $15 and $50) to join a group that is associated with a credit union. If you’re not sure whether you meet their qualifications, call the credit union and see what you have to do to join.

The next step is to identify the services you are interested in using and investigate which credit unions offer those services. There is a great deal of variation from one credit union to the next so don’t assume that the one in your town has all the extras of another one across the country.

If, for example, you are most interested in online and mobile banking, you may have to join one of the larger national credit unions to get satisfactory service. If your goals are to have access to low-interest credit cards or to take control of your auto loans are your goals, you can probably find that at a smaller local credit union.

Credit unions are a safe, reliable alternative to commercial banks, but there is no rule that says you can’t have accounts at both places and claim all the advantages both offer. One way or another, do your homework before you make a decision.

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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