Credit union members aren't
just customers -- they own the place
First in a five-part series: Credit Unions
By Michelle Samaad • Bankrate.com

Credit unions stem from humble and hungry beginnings.

When a season of failed crops in 17^th-century Germany led to widespread famine, villagers came up with a way to pool money and beat starvation: a jointly owned mill and bakery that sold bread to members at affordable prices. Savings accounts and small loans also were available.

Today, the basic premise of a not-for-profit credit union remains a cooperative financial institution, owned and controlled by the members who use its services.

Lives and work in common
Credit unions typically serve groups that share something in common, such as where they work, live or go to church. Becoming a member of a credit union carries power -- including a strong say in how the credit union operates. Each member has the ability to vote for the board of directors and on credit union rules.

Credit union membership was put to the test eight years ago, when the American Bankers Association filed a lawsuit against the National Credit Union Administration, the agency that supervises and insures federal credit unions.

The ABA charged the AT&T Family Federal Credit Union in North Carolina with overstepping a provision in the Federal Credit Union Act that limits the number of members.

At issue: Whether credit unions could sign up several different companies or groups that had no common bond with the original organization. These outside groups wanted to join the credit union because they didn't have the minimum of 500 people to start credit unions of their own.

Supreme Court decision
After a series of court battles and appeals, the Supreme Court ruled that the credit unions had overstepped their bounds. But passage of the Credit Union Membership Access Act last August permitted federal credit unions to continue signing up groups that didn't have the required number of people to start their own credit unions.

During 1997 -- the year when most of the major court appearances took place -- federal credit union membership dropped from 73 million to 70 million people, with 228 fewer credit unions.Since 1990 -- when the ABA lawsuit was initially filed -- the number of credit unions dropped from 14,549 to 11,531, as of last June. But the number of people belonging since then has increased from 61 million to 75 million.

"This is a tremendous time for credit unions," says Larry Blanchard, campaign coordinator of the Credit Union Campaign for Consumer Choice, a group that helped to push through the field-of-membership legislation. "There seems to be a shift in thinking and action toward credit unions brought on by bank mergers, a strong economy and traditionally high rates."

The benefits of membership
People join credit unions for a number of reasons, but at the top of the list is the fact that members own the credit union. This means that members reap the benefits of strong financial years through lower rates and cash bonuses.

It also means that members are protected should a credit union fall on hard times. Unlike banks, credit unions rely on financial reserves to absorb unexpected losses from loan defaults or other financial setbacks. Banks typically will either close or pass higher rates on to consumers.

Credit unions usually offer better rates on certain products and may offer borrowers a bit more leeway during the mortgage or auto loan approval process.

"Once a member, always a member -- the creed of most credit unions -- means long-term relationships with you, your children," Blanchard says. "For this reason, credit unions will work hard to get that car refinanced or that loan approved."

For Dante Williams, a doctoral student at Florida State University in Tallahassee, joining the school's credit union meant not only an inexpensive checking account that earned dividends each month but a credit card with a low 10.9 percent interest rate.

Williams says he was "bombarded" with literature from area banks before he arrived in town, "So I didn't think to go to a credit union when I moved here from Syracuse. I think what did it for me was the consistently low rates on the credit cards." Williams now is considering applying for a used car loan through the credit union.

Each credit union's board of directors determines what the rates and fees for products will be based on several factors: the cost of operating the credit union; the credit union's ability to woo potential members in an area that already has many banks; and its ability to offer members more than one product.

A variety of rewards
Unlike banks, credit unions often pass their savings on to members. Some credit unions offer reduced fees on checking accounts to members who use direct deposit for their paychecks. Other credit unions reward members with lower interest rates on loans if borrowers set up payroll deductions to make the loan payments.

While incentives to join a credit union can be tempting, the final decision often lies in a person's daily banking behavior. Most credit unions charge members to use their automated teller machines to cover maintenance costs. Likewise, most credit unions don't have large ATM networks, although a number of credit unions are forming no-surcharge alliances among themselves.

Some credit unions may not offer safety deposit boxes, cashier's or certified checks, and the majority won't return checks -- members must keep carbon copies.

Ultimately, when deciding to use a credit union, "It's a question of fee comparison," says Tiffany Lee-Gordon, vice president of the Advocate Group, a research foundation based in Seattle. "Some people will look beyond the lack of ATMs, just to have the better savings and credit card rates."

-- Posted: April 5, 1999