Are Credit Unions Foolish?


Fools exploring all the alternatives to traditional banks should certainly not pass Go without first finding out what their local credit unions have to offer. For many, many Fools, a credit union will provide better service with noticeably better rates and fees than any national behemoth bank, or even their friendlier smaller-scale local banks.

According to the Credit Union National Association (CUNA), a credit union "is a cooperative financial institution, owned and controlled by the people who use its services. These people are members. Credit unions serve groups that share something in common, such as where they work, live, or go to church. Credit unions are not-for-profit, and exist to provide a safe, convenient place for members to save money and to get loans at reasonable rates." Essentially, credit unions are collectives of people brought together to loan each other money at fair rates. Pretty simple, actually.

The purpose of any business is largely to serve its owners. In the case of a bank, owners are outside shareholders, and the purpose of a bank is ultimately to serve those owners by making profits from its customers. Thus, at banks, fees are high, and interest rates on deposits are kept low.

With credit unions, the members/depositors/owners are all one and the same. Credit unions are run not-for-profit, and thus are able to deliver substantially higher rates than banks for the same deposits. According to Bank Rate Monitor, the average yield on a money market account is about 1.5% higher at a credit union than the national bank average. Additionally, the end of the year sees some credit unions rewarding its members with cash bonuses if financial targets have been met.

Because credit unions exist to serve their members best rather than to make the biggest profit, the service at a credit union is generally considered superior to that given by banks. Credit unions are known for providing better financial guidance and better financial education to their members than banks are to their customers. The employees of a credit union have their fellow members' interests at heart, and (from what we hear on our message boards) most credit union members love the personalized service they receive.

How to Find a Credit Union That You Are Eligible to Join

Today there are more than 72 million credit union members, so it isn't that hard for most Americans to find some union or another that will welcome them as a member.

Traditionally, the way to find a credit union you are eligible to join (remember, some are set up for church groups or specific employers) is to start asking around. You can ask your boss to set one up, or ask your family or neighbors if they know of a good one. Here at the Fool, we're of course kind of partial to doing our own research right on the old Internet.

What's the Downside?

With all this talk of how wonderful credit unions are, and how much more Foolish they are than the standard PhirstCitiBancs that have taken over the world, surely, you are saying, there must be some drawbacks. And, indeed, you would be right to say just that.

No ATMs: The main drawback to a credit union is that they don't have the ubiquitous ATMs that make the big banks attractive. Credit unions typically have a pretty limited number of branches, and oftentimes that limit is just one. Or even none. However, to get around this, in most states credit unions have formed no-surcharge ATM networks among themselves, thereby multiplying the number of free machines available to all members. On the Internet there are plenty of lists of free ATMs available in your area, so for many this shouldn't be a problem.

Insurance May Not Apply: Although in most credit unions deposits up to $100,000 are insured by the National Credit Union Administration, an agency of the federal government, approximately 3% of credit unions are not insured. The $100,000 protection is essentially the same as that offered on bank deposits by the Federal Deposit Insurance Corporation. Obviously, make sure that any credit union you are considering becoming a member of is insured.

Checks Don't Come Back: Credit unions have special wacky names for things you're familiar with. A savings account is called a share account and the term for a checking account is a share draft account. Not really a big problem. What might be a problem, for some, though, is that at most credit unions, canceled checks are not returned to members. This isn't too big of a problem -- you just need to keep a carbon copy of the checks you write.

Range of Services: Many credit unions have a comparatively limited number of financial services available. While share accounts and share draft accounts are pretty ubiquitous, not all credit unions will have a full range of loan services and some of the more unique banking products offered. This is a problem that is quickly disappearing as credit unions are expanding their services. If you're thinking of joining a credit union, make sure it offers the full range of services that you think you'll be needing.

Credit Unions -- Now Online, Too

Frankly, these days, what isn't? Anyway CUNA provides a search program for online credit unions. Check it out, if you're looking for the best options.

Odds 'n Ends

The banking industry really, really hates credit unions, because of the threat credit unions present to the lower-service banks. Banks have mounted intensive lobbying efforts to get Congress to pass laws to make credit union operations taxable. Thankfully, these efforts have all failed.

If you're unsatisfied with your current bank for whatever reason, check out the competition that your local credit unions (or the online ones) are presenting.

Credit unions -- they're Foolish.

What if your broker offers banking services? Should you consider using theirs?

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