Are you looking for alternatives to the big banks? How about a credit union. You’re more than an account number or a credit rating when you go for a loan. You’re the shareholder, so no one is trying to make a profit on your back.
Credit unions are nonprofit cooperative organizations structured like banks. The members pool their savings for deposits and then lend the money to other members in order to earn interest and cover expenses. Credit unions tend to pay higher interest on deposits and charge lower interest on loans than traditional banks because no one wants to see a profit. The customers, not shareholders, reap the rewards. In most cases, deposits are insured up to $250,000 by the National Credit Union Administration, a federal agency that also regulates credit unions.
Although credit unions are membership organizations, you can probably find one that will take you. Some limit membership to people who work for certain companies or who belong to certain organizations, but others will take anyone who lives or works in their service area.
Even membership in an affiliated organization can reach a broad group; Catholics in Cleveland can join either the Ohio Catholic Federal Credit Union or the Unity Catholic Federal Credit Union, while the Library of Congress Federal Credit Union is open to anyone living in Washington, DC. And you might even be able to fudge it a bit. The Polish & Slavic Federal Credit Union, with branches in New York, New Jersey, and Illinois, is for people of Polish and Slavic descent, although people of other ethnicities can join if they apply in person at one of the sponsoring cultural organizations. For an extra few points of yield, it might be worth the trip. You can find different credit unions at the NCUA website.
In addition, some credit unions are designated as Community Development Credit Unions, designed to increase access to low-cost financial services in neighborhoods that tend to be ignored by traditional banks – and well-served by payday lenders and other predatory financial companies. These credit unions will often take investments from people outside of their service area in order to raise funds to lend out. If the credit union is chartered to serve low-income customers, non-members can make their investments in the form of federally insured CDs or savings accounts – a nice benefit for people looking for a safe and socially responsible place to deposit funds. You can find out more about these investment opportunities at the National Federation of Community Development Credit Unions website.
For all the benefits that credit unions offer to savers, borrowers, and communities at large, they have some drawbacks. Some are overwhelmed with new members; some are savers looking for any kind of yield advantage in the current market, and others are cynics frustrated with the commercial banking industry.
Say what you want about JP Morgan Chase, but the megabank has good customer service: a huge nationwide network of ATMs, online and mobile banking applications, convenient branches, and even helpful telephone representatives. Most credit unions, by contrast, have just a few ATM and branch locations and hardly any online services. If you want to deposit money in a low-income community development credit union, you’ll probably have to send a check in the mail. Some customers find that really frustrating, and they leave almost as soon as they join.
And, almost all credit unions have the same problems with bad loans, higher operating expenses, and increased capital requirements that have hurt traditional banks. The churn in membership only adds to the pressure. Some credit unions have failed, whether from higher capital requirements or bad loans. In 2010, 19 of the nation’s 7402 federally insured credit unions closed in 2010; 15 closed in 2009. In most cases, the accounts of a failed credit union are transferred to a nearby one that is solvent. In a handful of cases, depositors simply get their money back and have to move it to a new financial institution on their own.
Although a credit union may not be able to meet all of your financial needs, it can do a great job with the basics. If you are considering a credit union, first figure out if you are eligible for an insured account. Then, determine your service needs. If having access to a no-fee ATM wherever you go is important, a credit union probably isn’t the best bet for your checking account – but it might be a fine fit for a 24-month CD.