Why You Really Oughta Check Out Credit Unions
Credit unions typically offer higher savings rates and lower loan rates than brick-and-mortar banks
Traditional banks are far more popular than credit unions. In the third quarter of last year, the nation’s 5,300 banks had $18.6 trillion in assets, compared to $1.6 trillion at the nation’s 5,400 credit unions.
But popularity sure doesn’t translate into a better deal for customers. By just about every measure that matters to household pocketbooks, you can get a better deal at a credit union.
According to S&P Global Intelligence, in December 2019 the average credit union rate paid on a one-year certificate of deposit (CD) was 1.3%, compared to an average of 0.97% for banks. The average credit union rate on a five-year CD was 2.06%, compared to 1.6% for the average bank rate. (That said, online savings banks often offer even better deals than credit unions.)
The increasingly popular unsecured personal loan tends to be a better deal at credit unions (9.36% average rate for a 36-month loan vs. 10.2% at banks).
For car shoppers smart enough to set their sights on a used car rather than a new one, credit unions definitely should be on their radar. The average rate for a four-year loan in December was 3.62% at credit unions and 5.56% at banks.
Credit unions are in a position to offer better deals in large part because they operate as nonprofits owned by their customers. A bank is all about generating profits with an eye on sharing the profit with investors in the form of stock dividends or share buybacks.
A credit union isn’t focused on maximizing profits, and when it does make money it’s plowed back into serving customers. Credit unions also are exempt from federal taxes, a sore point with the banking industry.
Dispelling credit union myths
The relatively small footprint of credit unions suggests potential customers — that’s you — are working off of faulty assumptions.
Myth 1: Credit unions are only for a specific group of people who work for a given employer or belong to a group.
Reality: Many credit unions offer easy ways for just about anyone to join.
It’s true that you must “join” a credit union. Historically, credit unions were for employees of the same company or government operation, or were organized around another type of affinity, such as employees and grads of colleges, or members of a religious group. But many credit unions today make it possible for anyone to join.
For instance, the Pentagon Federal Union (PenFed) is the third-largest credit union in the U.S. Anyone who has served in the military or worked for the U.S. government (as well as relatives of those who have) is eligible. You don’t tick any of those boxes? A one-time donation of $20 to the National Military Organization makes you eligible to join PenFed.
The Boeing Employee Credit Union (BECU) is the fourth-largest credit union in the U.S. As its name implies, being a current or former Boeing employee (or being related to someone who is/was) is an automatic ticket in. So too is living, working or worshipping anywhere in the state of Washington and select counties in Oregon. Live across the country? No problem. A $20 one-time donation to the Northwest Credit Union Foundation’s “Friends of the Foundation” makes anyone, anywhere eligible to join BECU.
A quick web search with the term “best ___ rates” (the blank being whatever you’re interested in, be it a one-year CD or home equity line of credit) will land you at sites that track savings and loan rates. Many include credit unions in those data dumps. If you see a compelling credit union offer, don’t assume you can’t take advantage of it.
Myth 2: Banks are safer
Reality: Credit unions have the same federal deposit insurance protection.
You are likely familiar with the Federal Deposit Insurance Corp. (FDIC) program that protects consumer deposit accounts up to $250,000 per account, per bank. For instance, if you have an individual account, it’s protected up to $250,000. If you also have a joint account at the same bank, it, too, is protected up to an additional $250,000.
If the FDIC logo is slapped on the bank’s front door, or web landing page, you’re good to go. In the rare event that your bank becomes insolvent, the federal government will step in and pay you back every penny you have on deposit up to the limit. An important note: Stocks, bonds, mutual funds or any other investment you make at a bank are not covered by FDIC insurance.
The same program exists for credit unions, but instead of the FDIC being in charge, another government agency runs the insurance program: the National Credit Union Administration (NCUA). If you see the NCUA logo on the front door or landing page, you’ve got the same protection as keeping money at an FDIC-insured bank.
If you are angling to take out a loan of any type, and you’ve got something funky in your financial story, a credit union may be more flexible. Most banks make loans with an eye toward then selling the loan to another entity that packages similar loans together and sells them as an investment. It’s known as loan securitization.
If you’re a lender and your end goal is to sell the loan off to be securitized, what you care most about is making loans that meet the requirements to be securitized.
Credit unions operate differently. They typically hold on to the loans they make. There can be more flexibility when considering a loan application that will be part of the credit union’s “portfolio” rather than having to please the securitization gods. That’s not to say that a credit union will make a risky/riskier loan. But it can mean that the lending team won’t automatically reject you for any one given problem, which is how securitized lending can offer work.