What is a Credit UnionWe’ve all heard of credit unions, but maybe we don’t know what they’re all about. Others may find them intriguing, but can’t bear to break up with their bank. According to data from Callahan & Associates, credit unions are enjoying record loan values as a result of fantastic membership growth.1 In fact, over the first quarter of 2016, credit union membership grew three times faster than credit activity in both regional banks and finance companies.2

What is a Credit Union?

A credit union is a financial institution that accepts deposits, offers checking and savings accounts (called ‘share accounts’), CDs and extends a variety of loans to its members. These members pool their deposits together and lend the money to each other. As such, they are not insured by the FDIC like traditional banks. Credit Unions are regulated by the NCUA. Credit unions are also designated not-for-profit organizations.3

Credit Unions and Millennials

The growth in credit union membership can be traced to millennials. In the first quarter of 2016, millennials accounted for 25% of credit union memberships, up from 20% just three years prior.4 Many millennials reject the behavior of the big banks (and their fees) and credit unions know this. They try and get millennials started with mortgages early on, hoping they will remain members for life. Then they have a built in customer base to pitch higher margin credit cards and auto loans.

How are Credit Unions Different from Banks?

Ownership

A major difference between a bank and a credit union is ownership. Most banks have investors, outside shareholders, that are the true owners and entitled to claims on the profits. At credit unions, the members (the depositors themselves) are the owners and their ‘shares’ in the credit union are commensurate with the level of their deposits.

Becoming a Customer

Banks are much more open to servicing the general population and virtually anyone can open an account with a bank. Credit unions are a bit different. As per the term ‘union’, membership has been restricted to groups of people that share a common bond. Traditionally, this commonality has been found with a particular employer, military branch, school or church affiliation. Examples in each category include Red Lobster Credit Union, University of Iowa Community Credit Union, Navy Federal and Evangelical Christian Credit Union, respectively.

Granted, with over 100 million total members, credit unions have gotten away from true exclusivity.5 Today, the commonality can be a less restrictive parameter such as location. While you can’t join any credit union you want (unlike a bank where you can basically open a savings account anywhere) there are a handful that anyone can join.6 The trick- donating to that credit unions partner charity. For example, Lake Michigan Credit Union serves the population living in certain counties of Michigan’s Lower Peninsula. But interested, yet distant, prospects can still gain membership with a $5 donation to the ALS society.7

Greater Flexibility

Credit unions can be more flexible and accept more risk with their customers. For example, some employee credit unions offer a service for accessing small, short-term loans, essentially cash advances, to members as an alternative to predatory payday lenders. This is known as an Employer Sponsored Loan Program. Because the credit unions already have an established relationship with the employer, the funds get deposited right into a checking account, and the repayment plus fees get deducted from their next paycheck. While the rates charged are still high, typically 13%-16% they are much lower than payday lenders who can be well upwards of 28%.8

Better Rates

Given their not-for-profit status, credit unions usually offer better rates and lower fees than banks since they aren’t focused on profitability. This is the main reason credit union membership is over 100 million. Further, since credit unions don’t spend millions of dollars on advertising like the big banks, they can usually pass these savings on to their members.

The interest rates offered on savings accounts by credit unions is typically higher than banks-the average yield on a money market account is roughly 1.5% higher, according to Bank Rate Monitor.9

The interest rates offered on savings accounts by credit unions is typically higher than banks-the average yield on a money market account is roughly 1.5% higher, according to Bank Rate Monitor.9

Conversely, the interest rates charged on loans by credit unions to its members are typically lower than banks. Rates are considerably lower on auto loans and lines of credit, while comparable for traditional mortgages. A greater percentage of mortgages are held on the books at credit unions than banks. The same is true of the servicing of loans.

There is a similar trend when it comes to fees. 80% of all large credit unions offer free checking accounts, compared to less than 50% from banks.10 Unlike banks, credit unions are also not allowed to charge pre-payment penalties on their mortgages.

What’s the Catch?

While the main appeal for most credit union members is the better rates and lower fees, the tradeoff is a smaller number of services offered, especially for members with more sophisticated needs. Another drawback is convenience. There are bank branches on every corner, but usually only one or two locations in a larger area for credit unions. Access to funds from ATMs is also more difficult for credit union members due to limited branch offices, although the network is growing credit unions will counter. And credit union’s online services still trail banks, as a whole.

Customer Protection

Another difference is the way credit unions are insured. Federally chartered credit unions are federally insured, but not through the FDIC (Federal Deposit Insurance Corporation) like traditional banks. The federal insuring agency for credit unions is the independent National Credit Unions Administration, NCUA. State chartered credit unions are regulated at the state level.

While the vast majority of credit unions are insured, about 3% of credit unions remain federally uninsured, so make sure you become a member of one that is.11 This small percentage are ‘privately’ insured, as allowed by their states. During the Great Recession, 28 credit unions either failed or were placed in “receivership” by their state.12 Receivership is a condition where a failed or insolvent business is taken over by a third party to administer the remaining assets and rights. The third party is appointed by a bankruptcy court or creditors. According to credit union consultant Tom Glatt, no federally-insured, credit union members have lost any of their money below the $250,000 insured limit, as the result of a failure.13

Fraud at Credit Unions

Because of their autonomy, credit unions sometimes have less regulatory oversight. That can be a double-edged sword. On the one hand, it reduces some compliance costs, the benefits of which can be passed on to members. Often, credit unions self-regulate by their members (you may have seen various car bumper stickers showing the driver is part of a credit union member watchdog program). On the other hand, it invites fraud. A forensic audit uncovered evidence of fraud as a contributing factor in 41% of the failures.14

Employment at Credit Unions

If you like what credit unions stand for, you might consider working for one. And many do-credit unions directly employed over 236,000 people as of 2012.15 According to Payscale, loan officers at credit unions earn $35,977, financial analysts make $45,153, while branch managers are paid $55,367.16

Everyone’s experiences working at a credit union are different but most cite relatively low pay as a drawback, although this is not surprising for not-for-profit entities. For example, loan officers at credit unions earn just 56% of all loan officers nationwide.17 The workers at the largest credit union in the U.S., Navy Federal, gave working there a 3.7 out of 5 stars on Glassdoor.18 While we love the concept of credit unions, people generally seek employment there because of what they stand for, not what they pay.

 

1,2,4http://www.mortgagenewsdaily.com/channels/pipelinepress/08122016-marijuana-in-mortgage-lending.aspx
3,5,15https://en.wikipedia.org/wiki/Credit_unions_in_the_United_States
6,7http://www.kiplinger.com/slideshow/credit/T005-S001-7-great-credit-unions-anyone-can-join/index.html
8http://www.toledoblade.com/local/2014/08/01/Credit-union-group-offers-alternative-to-payday-loans.html
9,11http://www.fool.com/Money/Banking/Banking06.htm
10https://www.washingtonpost.com/news/wonk/wp/2014/08/05/about-100-million-americans-are-now-using-credit-unions-should-you-join-them/
12,13http://www.foxbusiness.com/features/2013/02/04/3-tips-to-keep-your-credit-union-deposits-safe.html
14http://www.cutimes.com/2015/01/15/fraud-kills-41-of-failed-credit-unions
16http://www.payscale.com/research/US/Industry=Credit_Union/Salary
17http://www.bls.gov/ooh/business-and-financial/loan-officers.htm
18https://www.glassdoor.com/Overview/Working-at-Navy-Federal-Credit-Union-EI_IE7281.11,36.htm

 

 

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A Closer Look at Credit Unions
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A Closer Look at Credit Unions
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What is a credit union? We’ve all heard of credit unions, but maybe we don’t know what they’re all about.
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www.FinancialCareerOptions.com
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