What is a Credit Union? (#OWS)
This is a guest post by FogOfWar:
There’s been a call (associated with the “Occupy Wall Street” movement) for consumers to move their bank accounts from large TBTF banks into local credit unions. Nov. 5th is the target date. This is a similar message to one Arianna Huffington gave a few years back.
The above inspire a quick post on the subject of “What is a Credit Union and why is it different from a mega-bank?”
What can I do at a Credit Union?
Pretty much all the same stuff you can do at a bank. They have checking accounts (although they call them “share accounts”, it’s the same thing), savings accounts, CDs, credit cards, debit cards, auto loans, mortgages, lines of credit. All of the stuff a normal bank offers. Some of the smaller CUs (just like some of the smaller banks) don’t offer everything, but it’s substantially the same.
The only difference in services is that you generally can’t make investments (stocks, bonds, etc.) through your credit union. IMHO, this isn’t much of a downside, as the brokers associated with major banks generally aren’t as good as the standalone retail brokers (like Fidelity, Vanguard, TIAA-CREF, etc.)
The other difference is that you can’t just walk off the street and open a credit union account; you have to be eligible in their “field of membership” (more on that below).
How are the rates?
It varies, but in general you’ll get better rates at a credit union than at a bank (certainly than at a megabank). An easy way to check is to look at your checking account statement now (or call your bank) and see what the APY is (Annual Percentage Yield), and then check the credit union to see the APY on their basic share draft account.
There are credit unions with sucky rates out there (often the really small ones—they have a lot of operational costs), but I’ve usually found that I get better rates on savings and better rates on loans from a CU.
What’s the real difference?
The real difference is ownership. Banks are owned by outside investors—usually people who own the stock for a big bank—and they need to pay those owners a profit in the form of dividends (or share repurchases which are economically equivalent). Credit Unions are owned by their depositors (called “members”). That’s why the “checking account” is called a “share account”—you own a “share” (another name for stock) in the credit union. The board of directors is elected at an annual meeting, one person, one vote. BoD members are not paid for serving on the board.
This also explains why Credit Unions can offer better rates: they don’t have to pay a profit to their stockholders, instead that “profit” is returned back to you, the owners. Note that CUs are also exempt from corporate tax, and this makes some difference, but IMHO, it’s the absence of needing to pay dividends that really gives CUs the ability to pay better rates to their customer/owners.
Am I supporting the community when I deposit with a Credit Union?
There’s a good argument that yes, you are. Credit Union’s make loans back to the people in their membership. So the money you put on deposit is being leant back to people in the community of the credit union. Credit unions don’t trade derivatives or run speculative investment books. By and large they make loans to members and then hold on to those loans (i.e., they don’t “securitize” those loans out to other people).
For those who know the movie It’s a Wonderful Life, it’s a pretty good description of how a credit union can work within a community. Technically the movie describes a Thrift (somewhat similar), but it could just as easily been about a CU.
Who is eligible to join a Credit Union?
Each credit union has a “field of membership”. Some are employment-based, so you are eligible if you or an immediate family member works at a certain place. For example, NBC has a credit union for its NY employees. Note that NBC does not own the credit union, the CU is owned by its members (one person, one vote), it’s just that the credit union is there for NBC employees.
Some credit unions are associational. A good example of this is church credit unions (which are pretty common). There are also Community Development Credit Unions, which are set in lower-income areas and anyone in the area can join (Lower East Side People’s FCU is a good example).
There are a number of educational credit unions—these vary, but often faculty, students, employees and alumni are all eligible to join. Again, note that the university does not own the credit union—the CU is owned by the members—it’s just the prerequisite to join that particular credit union.
How do I find a credit union I can join?
There are some “credit union locators” online, but the one’s I’ve seen kinda suck. I’d say try a Google search. So if you live in Boise, I’d search for “Boise Credit Unions”. You can also try www.ncua.gov, which will give you all the credit unions in a particular area. I tend to like the larger credit unions (at least $20m in assets), as they tend to have hit a size where they’re operationally more together (making mistakes on your money is no fun).
You can also ask at the HR department at your job “hey, does working here make me eligible to join a credit union?” If they say “no”, you can say “why not? Is anyone working on having us join up with a good CU?”
Are there any downsides?
There aren’t a lot of ATMs, so every time you need cash & use a bank ATM, you’ll be paying that ridiculous fee. This can definitely suck, although one way around it is to have a debit card and take cash back all the time when you buy stuff (there’s no charge for taking cash back on a debit card—it’s just a question of whether the merchant lets you do it, and most supermarkets and drug stores do).
Also, this makes depositing paper checks a pain in the ass: you actually have to put them in an envelope and mail them to the credit union. How did society function before we had the internet?
Also, if it’s a work credit union, you can check to see if they have a branch at your office—this can make things a lot easier.
Anyway, that’s a quick rundown. Sure I missed something, but I’ll drop it in the comments if I remember later.
Here’s a flyer I made for OWS which contains information on a few credit unions in New York City: