November 25, 2009 in Credit Cards

In an environment of rising bank card fees and rates, credit cards  from a credit union can make a better choice than a bank-issued card. Credit unions are nonprofit financial cooperatives owned by their members, and usually offer more reasonable rates and fees on their credit cards than banks.

Median advertised interest rates on credit union cards were about 20 percent lower than on bank cards, according to a July 2009 study by the Pew Charitable Trusts, which compared credit cards from the 12 largest credit unions and 12 largest banks. The median late and over-limit fee was $20 at credit unions and $39 at banks.

“Bottom line, the credit unions are offering lower upfront rates, with lower fees and less risk of unfair or deceptive practices,” says Nick Bourke, author of the report and manager of the Pew Safe Credit Cards Project.

Still, credit union cards might not be for everyone. Rewards cardholders may prefer the more generous rebates of major bank card issuers, while those with large balances and high interest rates might benefit from a credit union-issued credit card. Weigh the pros and cons of credit union cards before you make a switch.

Pros

Lower fees and interest rates. Consumers who routinely pay a few days late or carry a balance may find that a credit union card is much cheaper to use than a bank-issued card.

Besides lower APRs on new purchases, penalty rates on credit union cards are also lower than on bank cards. Credit union cards imposed a median penalty APR of 17.9 percent, while bank cards charged 28.99 percent, according to the Pew Safe Credit Cards Project.

Half of the credit union cards surveyed didn’t even charge penalty interest rates, and over half of those that did imposed it only when the account was 60 days past due, which meets the CARD Act restriction on retroactive rate hikes. Only 10 percent of bank cards didn’t charge a penalty rate.

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Many credit union cards don’t charge a balance transfer fee. Consumers who haven’t been able to negotiate a lower interest rate on their bank card may enjoy a fee-free, or low-cost, balance transfer to a credit union card.

The Pew study found that only 25 percent of credit union cards charge a fee to transfer a balance from another card, compared with 88 percent of bank cards surveyed. The median balance transfer fee on credit union cards was 2.5 percent, compared with 3 percent on bank-issued cards. All of the credit union cards that charged a balance transfer fee also set a maximum fee, while only 13 percent of bank cards that charged a fee also capped it. The median cap for credit union cards was $50 and $75 on bank cards.

Protection against negative changes. Of course, many abusive practices, such as arbitrary rate hikes on existing balances, will be reined in once the Credit CARD Act takes effect Feb. 22, 2010. Until then, consumers are vulnerable to changes, such as rate and fee hikes.

Credit union credit cardholders are less likely to see wild changes to their credit card accounts. “We’re not here to pull any tricks, because our owners are our members,” says Judy Tharp, president and CEO of Piedmont Advantage Credit Union in Winston-Salem, N.C.

“Although they do have to make enough money to cover their expenses, put away reserves and all that sort of thing, they’re not there to make as much money as they possibly can off that program,” says Pat Keefe, spokesman for the Credit Union National Association, or CUNA, a nonprofit trade group based in Washington, D.C., and Madison, Wis.

Keefe says one change credit union cardholders could see as a result of the CARD Act is their fixed rate changing to a variable rate. The CARD Act has tighter restrictions on fixed-rate products. For instance, it imposes a rate freeze on new accounts for the first year, but lets variable-rate cards fluctuate with a market index. As of July, 64 percent of credit union cards offered a fixed rate on purchases.

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Cons

More hassle to get a card. You have to become a member of a credit union before you can apply for one of its credit cards.



You can’t join just any credit union. “Credit unions are defined by their field of membership. You have to belong to some qualifying group,” says Keefe. Credit unions may restrict membership to particular communities, employers or organizations. For example, Navy Federal Credit Union serves Department of Defense members and their families.

To see which credit unions you’re eligible for, use your connections. Check with your employer. Ask relatives if they have a credit union they use because you may be able to join as a family member. Check with any groups or associations to which you belong.

Shop around online. Bankrate.com has several credit union listings, but you should also try Findacreditunion.com or the credit union locator from CUNA.

Before you apply, make sure the credit union actually has a credit card program. According to CUNA, just 53 percent of credit unions offer credit cards.

To join you have to buy what’s known as a “par value” share in the credit union. “The credit union, being a cooperative, our members are considered shareholders,” says Tharp. She says the value of the share typically ranges from $5 to $25, and the one-time deposit makes you a lifetime member with access to all the products and services.

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Banks also offer low rates. “Credit union rates on their cards are on average less than bank cards, but it’s not like they’re five, 10 points less,” says Curtis Arnold, founder of North Little Rock, Ark.-based CardRatings.com and author of “How You Can Profit from Credit Cards.” “I see a lot of credit union cards that are right around 12(percent), 13 percent.”

So, make sure the APRs at credit unions for which you’re eligible really do have better rates than those offered by banks. Arnold cites Simmons First, an Arkansas community bank, as an example of a bank that offers a rock-bottom APR — 7.25 percent on its Visa platinum card.

“Consider all your options,” Arnold says. He urges revolvers to look for the lowest interest rate, regardless of the issuer.

Few options for “bad credit.” If you have less-than-average credit you may have trouble qualifying for most credit union cards, according to Arnold. “Before I applied, I would make sure my credit was good, 730-plus on FICO.” You can estimate your FICO score for free here.

If you have poor credit, look for a credit union that offers secured cards, which are backed by a collateral account funded by the consumer in case of default. The deposited amount usually sets the credit limit.

Ho-hum rewards. “The rewards cards usually aren’t as aggressive in terms of a rebate. You’re going to get 1 percent cash back or 1 point per dollar spent — usually pretty plain-Jane, no-frills kind of rewards programs,” says Arnold.

“If you’re not revolving a balance, unless you’re getting dinged with a lot of fees because you’re paying late or whatever, then usually it’s not going to make sense” to go with a credit union rewards card, he says. “As a general rule of thumb, you’re better off shopping for a bank rewards credit card program.”

Shorter customer service window. You may get a warmer reception when you call customer service, but smaller credit unions may have limited hours of operation. Make sure you check customer service availability as you shop around.

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