Deposits are now insured up to $250,000, and credit unions offer plenty
of other compelling reasons to sign up. You may also get better service and
lower rates in the bargain.
Today's financial maelstrom has consumers fleeing to safe havens to park their hard-earned
cash. One place that's largely been off the radar for most folks is the neighborhood
credit union.
These relatively small financial institutions long have been perceived as antiquated
and unable to provide the same services as banks, but just the opposite is true.
Today's credit unions provide the full cornucopia of services that banks provide.
They are fully open for business. And because credit unions largely avoided
offering risky mortgages, they are among the few success stories to emerge from
the subprime mortgage mess.
Deposits insured to $250,000
The federal government recently bolstered the security of credit union deposits
with the passage of the Emergency Economic Stabilization Act of 2008, the same legislation
that increased FDIC deposit insurance limits. Deposits in share accounts are
now insured up to $250,000 through the National Credit Union Share Insurance Fund,
or NCUSIF, through Dec. 31, 2009.
The coverage will apply to all federal credit unions and the vast majority of state-chartered
credit unions. Previously, accounts were insured up to $100,000. Credit
unions hold just under 6.2% of consumer deposits compared with banks, which possess
the lion's share. But the services and low rates credit unions offer may warrant
a second look.
How credit unions differ from banks
The National Credit Union Administration, or NCUA, a government agency, regulates
federally chartered credit unions. State-chartered credit unions are regulated by
their state financial regulators. In addition:
* Credit unions are not-for-profit financial cooperatives where each member is a
shareholder. The terms "account holder" and "customer" are not used.
* Credit union members open "share accounts" that can be checking or savings accounts.
Depending on how profitable the credit union is at the end of the year, surplus
earnings are returned to members in the form of dividends, lower loan rates or reduced-cost
services.
* Credit unions derive their membership from a specific "field of membership." A
field of membership may consist of people who live in a particular community, work
at the same company or belong to a specific trade group. No one outside the
field of membership can join. (If you want to check your options, you can use the
credit union search tool at JoinACU.org.)
* Federally chartered credit unions cap interest rates on loans and credit cards
at 18% compared with banks, which can charge much higher amounts on delinquent or
defaulted accounts.
Better service, lower rates
Credit unions historically have emphasized personal service and lower rates as major
components of their mission. Recently the industry has experienced an uptick
in the number of people applying for membership. We can't say whether it's the (financial)
environment or the fact that we've got some very attractive specials going on right
now, but we are seeing more people moving their money from where they feel are riskier
places.
Credit unions can offer their members a better deal because any extra profits are
returned to members in the form of dividends or lower fees after operating expenses
and capital reserves are accounted for. In addition, these institutions offer
favorable rates relative to competitors. The average interest rate for a standard
fixed-rate credit card issued by a credit union was 11.75%, versus 13.17% for a
bank-issued card, according to a June 2008 NCUA survey.
Less risk to consumers
Because they have no stockholders to answer to, credit unions are not pressured
to get involved in risky investments, such as mortgage-backed securities. This is
what many financial institutions did on Wall Street so they could increase the return
to their stockholders.
You won't find those types of investments in the credit union industry. Therefore
earnings are not being impaired by them.
Although no one is immune from the current crisis, credit unions are safer bets
because they are essentially restricted to investing in federally backed securities
that are generally considered safer.
Credit union delinquencies, charge-offs and bankruptcies have increased, but they
haven't increased to the extent to which bank charge-offs, delinquencies and bankruptcies
have increased.