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Credit unions help young savers start

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The growing cost of gas, groceries and other expenses has many Americans — including young adults — looking for ways to save extra money.

However, some people overlook one source of savings: joining a credit union.

Credit unions typically trump banks by offering lower interest rates on credit cards, car loans and mortgages. They also pay out higher interest rates on savings and may have reduced or limited fees associated with checking accounts, ATMs and online bank services.

Credit unions can afford these better rates because they are run as cooperatives in which each member is an owner. Unlike banks, credit unions operate as nonprofits and return earnings back to members.

“The biggest draw is that they are member-owned and their nonprofit status allows them to be driven by service, while the other financial services sector focuses on stockholder profits,” says Rashmi Rangan, executive director of the Delaware Community Reinvestment Action Council, a nonprofit advocating for equal access to credit and capital for underserved populations in Delaware.

Many young people traditionally have difficulty obtaining credit because their incomes are low and they have little or no credit history, according to Mike Schenk, vice president of economics and statistics at the national trade agency Credit Union National Association, or CUNA.

The ongoing credit crunch has caused banks to further tighten their lending standers, making it even more difficult for young people to build a credit history, Schenk says.

“Credit unions, in contrast, are chartered to serve their members’ needs and are more likely to not have changed their underwriting standards significantly in the marketplace,” he says. “Therefore, they are making loans that other lenders do not, with really low rates and really low fees.”

Credit union advantages

Nearly 90 million people in the U.S. belong to a credit union, according to CUNA. They save $10.9 billion a year by using a credit union instead of a bank, CUNA figures show. This works out to be about $126 per person, or $239 per household.

Individual credit unions offer different products and services, but most share some basic services to help young adults meet financial needs.

According to CUNA’s 2007 Credit Union Profile Report, 99 percent of larger credit unions (asset size of $100 million or greater) offer checking, certificates of deposit, IRAs, first mortgages, auto loans and unsecured loans.

Credit unions also offer their services at fees that can be significantly lower than those of commercial banks. Every year, CUNA uses a third-party vendor to survey and report average fees between credit unions and 500 commercial banks, Schenk says.

“Our most recent survey proves credit union fees in general are much lower,” he says.

A CUNA survey found that people who use financial institutions are especially concerned about a handful of fees: checking account nonsufficient funds fees, credit card late-payment fees and mortgage origination fees.

Comparing credit union, bank fees
Average fee Credit unions Banks
Checking NSF $20 $30
Credit Card late fee $25 $39
Mortgage origination $1,500 $2,982

Source: Credit Union National Association

Some young people may choose banks over credit unions because they want to make sure their deposits are insured by the Federal Deposit Insurance Corp Corporation. However, credit union deposits also are insured.

The National Credit Union Share Insurance Fund insures deposits up to $100,000 for individual accounts and $250,000 for individual retirement accounts.

Young adults and choices

Younger customers place more weight on certain factors when selecting a financial institution, says Josh Jones, manager of young-adult programs at CUNA.

For example, young adults are especially interested in online banking options and conveniences such as ATM availability and mobile banking.

Many — although not all — credit unions offer these conveniences valued most by young adults. CUNA’s 2008 Technology and Spending Report shows the following:

Cutting-edge credit union services
  • 68 percent offer an Internet banking service.
  • 49 percent offer an electronic bill payment service. Of those, 25 percent charge a fee for EBP service. The average monthly fee is $4.58.

To compete with some of the larger national banks, many credit unions are part of a nationwide system of 25,000 surcharge-free ATMs, Jones says. Credit unions are less apt to charge for foreign ATM services, he says.

Nikki Dougherty, 35, of Wilmington, Del., joined a credit union five years ago because she was tired of paying a monthly fee on her checking account at her bank.

“Whenever the account went below a certain balance, I paid $10,” says Dougherty, who works as a sales associate at a home improvement/hardware store.

Her credit union doesn’t charge a minimum balance fee and she’s been happy with the customer service and product offerings.

“Overall, I’m satisfied,” she says.

Possible downside

While credit unions are often a great choice for young adults, they aren’t perfect.

The biggest disadvantage of credit unions is that membership is not open to everybody.

Typically, people are eligible to join a credit union through their workplace or an organization to which they belong. In some cases, residence in a specific county or city may make you eligible for credit union membership.

Credit unions also may compare unfavorably to for-profit banks in some ways. For example, credit unions may not offer sophisticated services such as online banking and may have reduced hours of operation. Many small- to moderate-sized credit unions also do not have an after-hours or 24-hour call center.

Because they try to keep their customer fees and expenses low, credit unions typically do not have the financial resources to offer cutting-edge technologies and services, Rangan says.

“Credit Unions unions often have an inability to make quick changes in today’s rapidly changing environment,” Rangan says.

Dougherty has experienced the technological drawbacks of her credit union.

“My only complaints are that my credit union’s online banking isn’t as sophisticated and easy to use and sometimes I have to go to far-off places to find a surcharge-free ATM,” she says.

Rangan says some credit unions also outgrow their customer-friendly reputations.

“Some larger credit unions get so big that management often distances itself from the membership,” she says. “Larger credit unions can lose their focus.”

When this happens, credit unions forfeit their inherent advantages and “offer little distinction between their products, services and fee structure than any other bank,” Rangan says.

Despite these drawbacks, Rangan believes young adults who take the time to research their options will find a credit union that meets their needs.

“There is a credit union that offers a great fit for the young adult, a fit that can grow with him or her and last a lifetime,” she says. “One just has to look around.”

To find a credit union, visit the CUNA Web site. To learn about a specific credit union’s product offerings and size, visit the National Credit Union Administration Web site.