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Bye, Bye, Banks: Time to Join a Credit Union

This story was updated on Jan. 15, 2010.

Steve and Angela Olson, a police officer and high-school teacher in Dubuque, Iowa, were adrift in credit purgatory. They knew they could get a better rate on their home equity line, but ran into serious resistance at their bank. "We kept getting mailings to lower the rate, but every time we applied, the bank said our credit score was too low," says Steve. And it was a vicious circle: Each loan inquiry left a black mark on his credit report, making it even less likely the couple would get approved.

After weeks of failed refi attempts, they turned to Dupaco Community Credit Union — which approved their loan application in 30 minutes. The new 5 percent variable variable rate saved the Olsons more than $300 a month. “I wish we’d checked into a credit union a while ago,” says Steve.

Given public opinion about banks right now — the label “vampire squid” was recently slapped on one particular investment bank, but it sums up the Q rating for the whole financial sector — this is a good time to be offering an alternative. But the nation’s 8,000 credit unions have more to recommend them than the mere fact that they are not banks. They also offer a fairly good value proposition, with higher savings yields and lower rates and fees. That may be why credit unions, which now have 92 million members, are seeing their fastest growth since 2003.

Lower Fees, Higher Yields

“In general, credit unions charge lower fees and loan rates than banks and pay higher savings yields,” says Stephen Brobeck, executive director of the Consumer Federation of America. While banks are paying roughly 1.1 percent on one-year CDs, jacking up credit-card rates, and charging stiff rates on loans and high closing costs on mortgages (assuming they’ll even approve you for a loan), credit unions are paying 0.30 percent more on CDs, offering enticing credit-card and mortgage terms, and charging nearly two points less than banks on unsecured loans.

What’s more, credit unions are healthier: Banks were five times more likely to have failed during the economic downturn than credit unions. Just 25 credit unions went under (0.32 percent of the total) compared to 130 banks (1.56 percent).

In case you’re wholly unfamiliar with this breed of financial institution, a credit union is a nonprofit owned by its members. The financial structure helps explain why credit unions can pay more on savings and charge less on loans. “The credit union channels any excess funds back to its members,” says Mark Wolff of the Credit Union National Association (CUNA). That trade group estimates that its members saved an average of $104 per person through lower loan rates and fees than by using banks. At all federally chartered credit unions and most state-chartered credit unions, the National Credit Union Administration insures deposits of up to $250,000 — the same limit as at federally chartered banks.

Although you can do much of your banking at a credit union, you may still want to keep a checking account at your bank for some services credit unions don’t always offer, and for ATM convenience. Credit unions tend to focus on the blocking and tackling of personal finance: savings, checking, credit cards, and loans for homes and cars. Only 22 percent of credit unions have safe deposit boxes and half provide money orders. And while your bank may have multiple branches locally, the credit union might have just one — or none at all.

Although only 59 percent of credit unions have ATM cards, those that do are generally part of ATM networks with machines at 7-Eleven, Walgreens, Costco, and at many banks. So if your credit union lets you swipe, you’ll probably be able to find a way to do it nearby. Credit unions with cards typically charge lower ATM fees than banks or no fees at all, though you’ll pay the ATM’s own fee, if there is one.

Choosing a Credit Union

The good news: It’s become much easier to become a member because about 10 years ago credit unions began loosening their requirements. You still need some sort of affiliation, though. Most credit unions are affiliated with places of employment; others are open to people who live in a specific community, county or states. A few are comprised of groups such as houses of worship and trade associations.

Seattle-based BECU, for instance, was once open only to Boeing employees and families (BECU stood for Boeing Employees’ Credit Union). Today, anyone who lives, works, worships, or attends school in a Washington state school district, can join, along with anyone with a Washington State Business License.

Pentagon Federal Credit Union, known as PenFed, traditionally served only members of the military, employees of defense-related government agencies, and their families. Today it’s also open to American Red Cross employees — and volunteers. It’s been making 60-month new-car loans at 3.99 percent, about half the national 7.87 percent rate charged by banks.

You can find a list of credit unions in your area using CUNA’s QuickFind online tool or by calling 800-358-5710. Typically, if you meet the membership requirements, you make a $5 to $20 deposit in a savings account — known at a credit union as a share account — and you’re in.

Mortgages, Credit Cards and Savings

The CUNA site’s Ratedex index compares the national average bank rate with credit union rates on a variety of financial products: savings, checking, and money-market accounts; one-year CDs; credit cards; car loans; unsecured loans; home equity lines; and mortgages. Here’s how credit unions stack up in the big categories.

  • Mortgages: You won’t necessarily find a bargain mortgage rate at a credit union, but you’ll probably have an easier time getting a loan than at a bank and pay lower closing costs. Many credit unions make mortgages, with down payments on 30-year fixed-rate loans as low as 3 percent. Recently, banks were charging 5.34 percent, on average, for a 30-year mortgage compared with 5.31 percent for credit unions; the rate on a one-year ARM was 4.56 percent, compared with 4.26 percent at credit unions. And credit unions charged an average $2,280 in closing costs, versus $2,309 for banks, according to the latest CUNA survey.
  • Credit cards: As MoneyWatch has reported, credit unions have some of the best deals on credit cards. We recently found 10 with variable-rate cards below 10 percent, including the Digital Federal Credit Union, whose Platinum Visa’s variable rate is as low as 8.5 percent. Digital Federal was originally chartered to serve the employees of the now defunct Digital Equipment Corp., but it now serves employees of more than 700 companies, from Doubletree Hotels to Texas Instruments, and is open to members of many nonprofits. You can search for low-rate credit union credit cards at
  • Savings: Although credit unions typically pay savers more than banks, even their rates are pretty measly these days. The average money-market account yields .75 percent at credit unions and .47 percent at banks, for instance. can help you find the best savings rates on money-market accounts and CDs. But you’ll still have to look up the particular credit unions online or call to learn whether you qualify.

Credit Union vs. Banks: Head-to-Head Comparison

Credit Unions (%) Banks (%)
Savings accounts
Regular savings 0.41 0.28
Interest checking 0.3 0.22
Money market fund 0.75 0.47
1-year CD 1.42 1.11
Credit cards
APR 11.64 12.75
Car loans
48-month new car 5.09 6.28
48-month used car 5.37 6.87
Home equity
Lines of credit 4.45 4.94
1-year ARMs 4.26 4.58
30-year fixed-rate 5.31 5.34
Source: Datatrac Research, 1/1/10

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