Should you boot your bank for a credit union?
Check the banking you do before making the switch
By Michelle Samaad • Bankrate.com

On a muggy morning last week, President Clinton closed a chapter in credit union history: He enacted a law that would allow these "people's banks" to add new groups of members.

The Credit Union Membership Access Act, or H.R. 1151, stands to affect membership requirements at 7,065 federal credit unions. For the past year and a half, credit unions have not been able to sign up new groups of members, as bankers fought to try and restrict credit union growth, claiming that credit unions had unfair tax advantages.

Now it's up to the National Credit Union Administration, the agency that oversees federal credit unions and its insurance fund, to finalize new regulations on who can join. The process should take between four and six months, according to Lesia Bullock, a credit union administration spokeswoman.

Whether to join a credit union
That means that soon, many Americans will have the option of joining a credit union. But is a credit union the right choice? The answer depends on how you bank.

In simple terms, a credit union is a nonprofit, cooperative financial institution owned and controlled by the people who use its services.

According to the Credit Union National Association, a trade group, since credit unions don't run to please stockholders, they don't fall to their knees in submission to the stock market demands that publicly traded banking firms cut costs and boost profits.

Credit unions historically have been able to offer lower rates and fees and still operate in the black. Credit unions rely on a financial reserve to absorb unexpected losses from loan defaults or other financial setbacks, and the majority of credit unions carry federal deposit insurance that protects individual accounts up to $100,000 in the event the credit union fails.

President Clinton signs he Credit Union Membership Access Act, or H.R. 1151.

Credit union pros...
With that said, what are the pros and cons of joining a credit union?

LOWER FEES AND BETTER RATES THAN MOST BANKS AND THRIFTS:
Whether shopping for a car loan, credit card, certificate of deposit or money market account, credit unions leave banks and thrifts in the dust.

A Bankrate.com July survey of credit unions, banks and thrifts looked at 50 of these institutions in the top U.S. markets and discovered that credit union rates beat banks by as much as 1.47 percent. Credit cards interest rates drop as low as 13.11 percent at credit unions, compared to a high of 17.90 percent at banks and 16.70 percent at thrifts. In particular, credit unions also are going after the automobile finance market more aggressively, said Fritz Elmendorf, vice president of communications at Consumer Bankers Association, a trade group representing retail banks.

"The larger banks are seeing a lot of market share in this area but the larger credit unions and the ones being run by ex-bankers are setting up arrangements where a nonmember can finance a car right at the dealership just by signing up to be a member," Elmendorf said.

MEMBERS OWN THEIR CREDIT UNIONS:
Credit unions can provide services only to their members and they are legally restricted as to who they can offer service by their field of membership.

Once these "common bond" provisions are met, a potential member submits an application and buys at least one share (typically $5) to become a lifetime member with full voting rights.

ANYONE WITH A COMMON BOND CAN START A CREDIT UNION:
For example, employees of corporations or members of associations such as the Kiwanis Club or residents of a defined area, such as a town or neighborhood.

...and credit union cons
But while credit unions offer better interest rates, lower fees and more customer control, their small stature can work against them when it comes to offering anything more than plain vanilla banking services.

LACK OF ATM NETWORKS:
Most credit unions won't have more than one ATM, and some don't have any machines, meaning members get hit with surcharges every time they use a bank's ATM. Credit unions in some states have formed no-surcharge ATM networks among themselves. Another problem that comes from not having a large ATM network, is that some credit unions charge members for using even their own ATMs, in order to cover maintenance and other costs.

INSURANCE MAY NOT APPLY:
About 3 percent of credit unions aren't federally insured.

NO RETURNED CHECKS:
At most credit unions, checks are not returned to members; members have to keep carbon copies for their records.

NO HELP FOR THE POOR:
Low-income borrowers may have a hard time securing a mortgage through a credit union, according to the Independent Bankers Association of America. Credit unions are exempt from adhering to the Community Reinvestment Act, which mandates financial institutions serve low-income communities. The bankers association reported credit unions rank behind commercial banks, mortgage companies and savings institutions in providing mortgages to low-income borrowers.

But Congress created the Community Reinvestment Act in 1977 to address redlining by banks and thrifts, said Mike Schenk, vice president of economic and statistics at CUNA & Affiliates. Further, "recent Home Mortgage Disclosure statistics show that denial rates on loans to minorities were higher at banks and thrifts than at credit unions," he added.

DEALING WITH MORE THAN ONE BANK:
Because of the limited financial products and services at some credit unions, customers may be forced to split some of their business with a bank.

Other factors to consider
Before giving banks the boot, consider how many financial transactions are made each month as a gauge for choosing a credit union, advises Michael Kidwell, vice president of Debt Counselors of America.

For example, if a bank account holder wrote 10 checks one month and used the ATM 15 times with an account that charged a $7 monthly fee and 30 cents per ATM transaction, it would cost $11.50 a month, or $138 a year.

The bottom line? Compare fees, Kidwell said.

"Some credit unions may not offer things like safety deposit boxes, cashier's or certified checks," Kidwell said. "We've actually had clients who weren't able to get those type of checks from their credit unions."

If considering a credit union, keep tabs on the number of checks written, how often ATMs are used and the potential fees for those transactions. Banks on average will allow a certain number of transactions per month before the fees hit. Another consideration is whether money deposited in a credit union account will earn enough additional interest to offset ATM fees the credit union may charge.

Finally, does the credit union require a smaller balance but provide the same level of service and convenience as a bank? One usually overshadows the other, Kidwell noted.

For example, Kidwell recalls that he recently wanted to price a car he planned to sell. He went to his credit union and stumbled upon the National Automobile Dealers Association books laying right on the reception area's coffee table.

"Most banks just don't offer that type of convenience," he said.

Where to find a credit union
Bank-weary account holders have several avenues if they want to join a credit union. Start with CUNA, which has the listing of each state's credit union league.

Employees should also check with their personnel department to find out if their employers sponsor a credit union or is a select employee group, or SEG. These are groups of people who don't have the resources or numbers to form a credit union on their own. Some employers may even offer direct deposit through a credit union.

Ask family members if they're members. Most credit unions allow relatives to join but the word "family" may mean a wife can join but not cousin George.

There may be a credit union in the neighborhood that's defined by a geographic boundary. Ask your neighbors.

Finally, check the phone book for a listing of credit unions.

With its next official meeting Aug. 31, NCUA is pleased with the grassroots effort that helped to push the Credit Union Membership Access Act through Congress.

"It's a clear example of how Americans can affect the legislation system," Bullock said. "It's been wonderful to witness."

-- Posted: Aug. 14, 1998