Many of us have had more than our fill with the banks. High and frequent fees, the lack of a personal relationship, and difficulty getting loans are hardly uncommon with banks. That’s true even if you’ve been a customer of a bank for many years. But there is salvation out there, and you can find it at a local credit union. Simply put, credit unions are better than banks in almost every category.
Unlike banks, credit unions are actually financial cooperatives, that are owned by their customers, who are referred to as “members”. That classification results in a better banking relationship.
Here are the primary reasons why I’ve found credit unions to the superior banks.
Credit Unions Have Lower Fees and Free Services
For most people, this fact alone puts the debate to rest – you’re better off with a credit union since it will cost less to do business through them. A primary example of this is free checking. It seems to be standard at credit unions. Our family of four has four individual checking accounts through our credit union, and all four accounts are free.
This used to be true of banks as well, but most have gotten away from it. Under the best of circumstances, free checking is available through banks only if you leave a certain minimum balance in your checking, or in some other account that you have at the same bank.
If you don’t maintain that minimum balance, checking will be subject to monthly fees. It’s even possible to have a fee of $10 per month on a checking account that has little or no activity.
If you’re only looking to have a checking account, or if you don’t have the funds to maintain the minimum balance to get free checking at a bank, you’re better off maintaining your check account with a credit union.
At the Bank I’m a Customer – At the Credit Union I’m a Member
The difference between “customer” and “member” is more than just semantics. Since most banks are stockholder owned, I can be no better than a customer to a bank – unless I’m a major stockholder in the company. By contrast, credit unions are owned by their members, so I’m not just a customer, but an owner. You can feel the difference when doing business with either a bank or a credit union.
As a customer, the bank sees me primarily as a source of revenue – interest and fee income to the bank. They’re interested in keeping me happy to the degree that they can extract that income from me. But they have no personal stake in improving my financial situation, unless of course that improvement coincides with their efforts to extract said fee income. But it casts me squarely in the camp of being an outsider within the organizational structure of the institution.
My member status at the credit union affords me automatic special handling. Employees not only want to help me achieve my goals, but also to do it in the most cost effective way possible. Customer retention is at a premium with credit unions, which makes superior business sense. Even if you’re only using credit for free checking, eventually you will have other needs, such as a credit card, auto loan, or mortgage.
Credit Unions are what Banks Used to be
I’m old enough to remember when banks valued their customers. They showed it with quick loan approvals, free checking accounts, fee waivers, and toasters for opening new accounts. In many cases, bank employees knew their customers by name. A bank manager might approve your loan application because he knew you, your family or your business.
That’s long gone now, which at least partially explains why the elderly find banking so frustrating here in the 21st Century – they remember when it was more neighborly.
It’s still that way at credit unions. Since they are locally-based and geographically limited, they have a vested interest in taking care of local customers. And since you are a member of the credit union, rather than a customer, you get better treatment in general. It’s much easier to get an overdraft reversed, or a transaction problem cleared up, then when you have to deal with a typical bank bureaucracy.
Credit Unions Don’t Make Toxic Loans
Unlike banks, credit unions aren’t out canvassing the market for major commercial clients, the kind who might be in need of speculative loans. Though such loans can be profitable for banks, especially during a strong economy, many of them end badly, particularly when the economy goes soft. It only takes a small number of very large loans to jeopardize the financial stability of a bank. This is why banks can go from stable to insolvent in short order. Loans are the primary assets of lending institutions, and if they make bad loans, those primary assets evaporate.
Credit unions lend only to their members. That means mortgages, personal loans, car loans, and credit card accounts. In addition to the fact that individual loan balances are much smaller than they are for commercial loans, credit unions have their loans/asset bases spread across a much larger client base. This means that the failure of a single loan or borrower is far less likely to drag the credit union down upon default.
Lower default rates are a major reason why credit unions charge lower fees, but that’s not all. Have you ever seen downtown skyscrapers bearing the names of major banks? Credit unions don’t have those expensive edifices, and don’t need to collect high fees from you to pay for them.
Greater Lending Flexibility
Since members are the only loan source for credit unions, you have more flexibility when applying for a loan. It’s often possible to be approved for a loan by a credit union after being denied by a bank. This is especially true if you already have an established working relationship with the credit union. They know you, and know your finances, so they can be more flexible both in approving your loan and with the terms assigned to it.
As an example, we recently got a car loan at 1.99% approved in a matter of hours at our credit union. It was the most hassle-free auto loan we’ve ever applied for.
You Never Hear About a Credit Union Going Under
Actually, credit unions do go under! But when they do, it rarely makes for front-page news. Part of the reason is that credit union failures are infrequent. But perhaps more significant is that credit unions are much smaller than banks, and more typically limited to operations in a single state. In addition, credit union failures are typically not tied to large speculative commercial loans the way bank failures are.
There are more than 7,000 credit unions in the US. In 2015, a total of 11 credit unions were shut down by the National Credit Union Administration (NCUA), compared with eight banks that were shut down by the FDIC in the same year.
But more telling, 15 credit unions were closed down in 2009, the peak year of the financial meltdown. In that same year, 140 banks were shut down. It’s clear that when the stress on the financial system is greater, credit unions are the safer place for your money.
In the event that a credit union does close down, the NCUA, a branch of the US Government, performs much the same function as the FDIC does for banks. It’s purpose is to “Provide, through regulation and supervision, a safe and sound credit union system, which promotes confidence in the national system of cooperative credit (and to) protect consumer rights and member deposits.”
Through its National Credit Union Share Insurance Fund, credit union depositors are insured up to $250,000 per depositor.
Two Credit Union Disadvantages: Business Accounts & Credit Card Rewards
If you need to maintain a business account, a credit union probably will not work you. Because of their commercial orientation, banks offer a higher level of service. This is particularly true in regard to credit card sales, were banks do offer accounts to process such transactions. Banks also offer the possibility of obtaining business credit, though this seems to be something that is promoted far more than its practiced (translation: getting a bank business loan is close to impossible).
The lack of business services has not been a problem for me in any way. I work around it by using a credit union for personal banking, and PayPal for most of my business transactions.
The other major negative with credit unions versus banks is credit cards. Credit unions routinely offer credit cards, but banks are much more aggressive in the area of credit card rewards. However, there are two factors that minimize this disadvantage:
- You can typically get a bank credit card even if you don’t have an existing relationship with the bank that offers it, and
- People who are most interested in credit card rewards tend to be card-hoppers, changing credit cards frequently to take advantage of the credit card rewards deal du jour.
All of which means that you can do your basic banking at a credit union, and still take advantage of the best credit card rewards programs offered by banks.
To find a credit union in your area, check out MyCreditUnion.gov. If you haven’t used a credit union before, I think you’ll be pleasantly surprised.
Do you agree that credit unions are better than banks? Do you also agree that banking with credit unions is an excellent way to counter the growing cost of working with banks?