One of my money resolutions for 2014 is to switch banks. I've been a long-time customer of a big bank that, in recent years, has stood out among headlines that reveal sneaky and unethical business practices. That's not the only reason I'm switching, but it does help me want to change. In addition to looking at other banks, I've also been researching credit unions. Some people think credit unions aren't terribly convenient -- maybe they don't have online banking, or maybe it's hard to find an ATM when you're traveling. But I've found that, despite the potential inconveniences, there are advantages to consider when it comes to a credit union. Here are a few things I'm keeping in mind as I make my decision. INTEREST RATES
The main draw I've often heard about credit unions is they offer lower interest rates on loans and higher interest rates on savings.
Auto loans and mortgage loansIn 2013, financial research company Datatrac analyzed the average interest rate differences between credit unions and banks. When it came to car loans, banks' interest rates were about two percent higher. When it came to mortgages, rates were very similar.
Savings yieldsThe National Credit Union Administration also regularly analyzes the average rates of credit unions and banks. Their latest data ( June 2013) found that the average "regular savings" rate for a credit union was 0.14 percent. The national average for banks was 0.13 percent. But when it comes to choosing what works for you, you're probably less interested in average and more interested in best. According to Datatrac, the "bank high" savings rate is 1.06 percent. The credit union high is 3.00 percent, which is awesome, but not necessarily accessible. For example, I researched the credit unions in my community that I might be approved to join. On the high end, those credit unions offered an APY of 0.25 percent. My current bank offers 0.50 percent, and the bank I'm considering offers 0.85 percent. So while credit unions have the overall reputation of having higher interest rates, I guess it really depends on what's available to you in your community. But with a credit union high of 3 percent APY, it's definitely worth looking into. If you're getting a car loan, it's probably best to go with a credit union. But I'm not a big fan of car loans in the first place (though I understand people have their reasons), nor do I think I'll need one anytime soon. At this point in my life, I'm only concerned with interest rates when it comes to saving. On average, credit unions have better rates, but I'm not sure I have access to the high rates mentioned on these reports. FEES Credit unions are known for having low to no fees on their accounts. And while they may offer free checking and even checking with interest, I've come across a couple of banks that offer the same thing. Many credit unions require no minimum to open; the bank I'm considering doesn't require a minimum deposit either. What's more, according to a July 2013 article from the Washington Post, credit unions have been hiking up their overdraft fees faster than banks.
"The report shows that banks have held the median overdraft charge at $30 a transaction for the past four years, while credit unions have upped their price from $25 to $28 a transaction in the past two years."On the other hand, "fees are still lower on average at credit unions as of the first three months of 2013." I'm not planning on using overdraft protection, so this doesn't really affect me, but I thought it worth noting. An article from The Street also confirms the misunderstood stereotype that credit unions = no fees.
"Unfortunately, many who make the switch assume mistakenly that just because they're banking with a credit union, they're not going to be charged fees. The truth is that credit union members are just as vulnerable to fees as bank customers -- a fact that is rarely shared or acknowledged."Most people with credit unions love them and attest that they don't pay fees. And I'm not saying most banks don't assess ridiculous fees, but it does seem like the whole "no fee" thing with credit unions might be a little overrated. I'm not knocking credit unions; I'm just saying, if I switch, I don't think fees will play a huge part in my decision. BUSINESS MODEL
Structure Here's where credit unions win, by far -- the way they're structured.
Credit unions have a reputation of being more personal and focused on community, and there's a reason for that. When you open an account with a credit union, you become a shareholder. In fact, the operators of credit unions are members themselves. As Michele Lerner explained in a Get Rich Slowly question:
"First, unlike banks, credit unions are financial membership organizations. You don't open an account at a credit union, you become a member and use your deposits to buy shares in the business."Credit unions are also community-focused because a lot of their members belong to a similar group. My old company, for example, had a credit union. My university had a credit union. In Los Angeles, there are a lot of entertainment-industry-related credit unions. Theoretically, credit unions are private cooperatives that are owned and operated by their own members, the advantage being that local money stays within the community. Many people like the idea of that and, according to credit union members, it usually translates to a better "customer" experience.
ProfitWhile banks want to make money and appeal to investors, credit unions are not-for-profit, and their investors are their members. Any profit made from a credit union is supposedly returned to its members in the form of low interest rates or lower fees (although there's been some recent controversy over the industry overusing these profits on advocacy efforts). Overall, though, a non-profit structure usually translates to: a) not feeling like your financial institution is trying to take advantage of you, and; b) not seeing your financial institution's name next to the words "crooked" and "discrimination." While they're certainly not immune to questionable practices, the structure of a credit union seems to provide a better overall experience, and most credit union members attest to that. Overall, I suppose it depends on what you're looking for in a financial institution. Both options -- credit union or bank -- have their advantages and disadvantages. There's also the long term to think about. You might feel that, in the long term, the structure of a credit union may serve you better. In the long term, rates may be significantly better. Either way, in making a decision, there are a handful of things to consider. Loans, rates, business model, fees and convenience are all factors that could affect one's decision.
I'm still deciding, so I'd like to read your thoughts. Do you use a credit union or a bank, and what are some benefits and drawbacks of each?