As popular mistrust of banks and investment firms continues to grow, credit unions are earning recognition as a viable alternative. While these customer-owned nonprofit organizations have enjoyed regional popularity in pockets of the Midwest and Southeast for years, their national profile has remained subdued until recently.
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If you're unhappy with rising checking-account fees and increasingly punitive credit restrictions at your for-profit bank, you may be tempted to change course and join your local credit union. Then again, you might be surprised to learn that credit unions and banks have much in common. Before you make the switch, do a side-by-side comparison of these institutions to eliminate the potential for unpleasant surprises.
Advantages of Credit Unions over Banks
The divergent terminology that banks and credit unions use to describe their users demonstrates a crucial distinction between these two types of institutions. Whereas for-profit banks have "customers," nonprofit credit unions have "members." This hints at a key structural feature of credit unions: As nonprofit cooperatives, they are technically owned and operated by their members. While most large credit unions have a corporate-style hierarchy that implements day-to-day directives, all credit unions invite their members to vote on proposals that have the potential to impact the organization's structure and leadership.
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Their nonprofit, "member-focused" structure permits credit unions to charge lower rates of interest on the loans that they issue. The credit-score benchmarks that they use to determine eligibility for mortgage and auto loans may also be slightly more lenient than those used by traditional banks.
In addition, credit unions typically offer higher rates of return on savings instruments like certificates of deposit. They rarely charge checking-account fees and may forgive overdraft fees in certain circumstances. Even better, they may offer contests and perks in which winning members can earn dividend payments and other financial prizes.
The familiar character of the typical credit union's membership structure masks a potentially fatal drawback: for reasons that range from size constraints to respect for tradition, many credit unions impose onerous eligibility requirements on potential members. Some are even closed to the general public.
This is often by design. Many credit unions exist to provide low-cost credit to individuals who share points of common identity. There are credit unions for employees of certain large corporations, public-school teachers, and members of the Armed Forces. Credit unions that don't restrict their membership rolls by identity may instead impose geographic limitations, refusing to accept applicants from outside of a well-defined region. If you live in an area that isn't directly served by a credit union and you don't belong to a member class, you may be forced to do business with a traditional bank.
Even if you can join a credit union, you may find yourself stymied by its small size and relative lack of resources. Most credit unions have just a handful of branches and ATM locations. While some larger credit unions cover their members' out-of-network ATM fees, many smaller organizations don't. In addition, banks tend to offer far more robust customer-support networks and online banking opportunities. Unlike most credit unions, their call centers may also be open around the clock.
While nonprofit credit unions share much in common with for-profit banks, the differences are very important. If you can't make up your mind, consider splitting the difference and opening two separate accounts. If banks and credit unions can coexist peacefully in your area, your separate accounts probably can as well.