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The Basics

Is it time to join a credit union?

Deposits are now insured up to $250,000, and credit unions offer plenty of other compelling reasons to sign up. You may also get better service and lower rates in the bargain.

By Bankrate.com

Today's financial maelstrom has consumers fleeing to safe havens to park their hard-earned cash. One place that's largely been off the radar for most folks is the neighborhood credit union.

These relatively small financial institutions long have been perceived as antiquated and unable to provide the same services as banks, but just the opposite is true.

"Today's credit unions provide the full cornucopia of services that banks provide," says Fred Becker, president of the National Association of Federal Credit Unions. "They are fully open for business."

And because credit unions largely avoided offering risky mortgages, they are among the few success stories to emerge from the subprime mortgage mess.

Deposits insured to $250,000

The federal government recently bolstered the security of credit union deposits with the passage of the Emergency Economic Stabilization Act of 2008 (.pdf file), the same legislation that increased FDIC deposit insurance limits.

Deposits in share accounts are now insured up to $250,000 through the National Credit Union Share Insurance Fund, or NCUSIF, through Dec. 31, 2009.

The coverage will apply to all federal credit unions and the vast majority of state-chartered credit unions. Previously, accounts were insured up to $100,000.

Credit unions hold just under 6.2% of consumer deposits compared with banks, which possess the lion's share. But the services and low rates credit unions offer may warrant a second look.

How credit unions differ from banks

The National Credit Union Administration, or NCUA, a government agency, regulates federally chartered credit unions. State-chartered credit unions are regulated by their state financial regulators. In addition:

  • Credit unions are not-for-profit financial cooperatives where each member is a shareholder. The terms "account holder" and "customer" are not used.

  • Credit union members open "share accounts" that can be checking or savings accounts. Depending on how profitable the credit union is at the end of the year, surplus earnings are returned to members in the form of dividends, lower loan rates or reduced-cost services.

  • Credit unions derive their membership from a specific "field of membership." A field of membership may consist of people who live in a particular community, work at the same company or belong to a specific trade group. No one outside the field of membership can join. (If you want to check your options, you can use the credit union search tool at JoinACU.org.)

  • Federally chartered credit unions cap interest rates on loans and credit cards at 18% compared with banks, which can charge much higher amounts on delinquent or defaulted accounts.

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Better service, lower rates

Credit unions historically have emphasized personal service and lower rates as major components of their mission. Recently the industry has experienced an uptick in the number of people applying for membership.

"We can't say whether it's the (financial) environment or the fact that we've got some very attractive specials going on right now, but we are seeing more people moving their money from where they feel are riskier places," says Kathy Zierers, vice president of savings products at Navy Federal Credit Union, the nation's largest.

Credit unions can offer their members a better deal because any extra profits are returned to members in the form of dividends or lower fees after operating expenses and capital reserves are accounted for.

In addition, these institutions offer favorable rates relative to competitors. The average interest rate for a standard fixed-rate credit card issued by a credit union was 11.75%, versus 13.17% for a bank-issued card, according to a June 2008 NCUA survey.

Less risk to consumers

Because they have no stockholders to answer to, credit unions are not pressured to get involved in risky investments, such as mortgage-backed securities.

"This is what many financial institutions did on Wall Street so they could increase the return to their stockholders," he says. "That's not what we're all about."

"You won't find those types of investments in the credit union industry. Therefore our earnings are not being impaired by them," says Phil Greer, senior vice president of loan administration at State Employees' Credit Union in Raleigh, N.C.

Becker says that although no one is immune from the current crisis, credit unions are safer bets because they are essentially restricted to investing in federally backed securities that are generally considered safer.

"Credit union delinquencies, charge-offs and bankruptcies have increased, but they haven't increased to the extent to which bank charge-offs, delinquencies and bankruptcies have increased," says Becker.

Do's and don'ts

  • Do look for a credit union that insures deposits.
  • Do look for credit unions that offer a good number of online services.
  • Do shop for credit unions with the best rates, especially if you're eligible for more than one.
  • Don't join a credit union, especially smaller ones, if you expect an army of customer service agents to be available 24/7.
  • Don't apply to a credit union if you don't fit the field of membership.

This article was reported and written by Steve Santiago for Bankrate.com.

Published Nov. 5, 2008

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