CREDIT UNIONS

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CREDIT UNIONS

Published by sam - 23/09/07 - 10:09:41 am

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A credit union is essentially a nonprofit financial cooperative that offers its members many, if not most, of the services provided by banks. In theory, because credit unions are operated for the sole benefit of their members and have relatively low overhead expenses, both loan rates and savings interest rates should be more attractive than those offered by profit making financial institutions. A 1988 survey of banking services by Consumer Reports confirmed this.

Small credit unions provide their members with basic services loans and savings accounts, certificates of deposit, automated teller machines, direct payroll deposits, auto and personal loans, bill payment services and credit cards. About 10 percent of credit unions also offer mortgages.

Credit unions can assure their members of a high level of safety, because approximately 90 percent of them are covered by the National Credit Union Share Insurance Fund (NCUSIF), a federal agency that insures deposits in the same way that FDIC does for banks and the FSLIC does for thrift institutions. Approximately 58 million Americans maintain accounts in some 16,000 credit unions, and according to a recent survey, credit union member were more than twice as likely as bank customers to be satisfied with the services they receive.

For most consumers, however, a major drawback of credit unions is eligibility for membership. Although a few credit unions are open to the general public, most are sponsored by an employer or an association, and membership is generally limited to employees or members and their families. Consequently, only about 50 percent of American consumers have access to a credit union.

The limitation of access virtually precludes shopping among credit unions for the best rates, since normally your choice would be limited to those sponsored by your employer, union, church, or a community group or other association. Nevertheless, you should consider carefully any credit union for which you are eligible, because it may offer you advantages not available from traditional banks.

Credit unions are able to offer low loan rates and high interest rates not only because they are non profit organizations but because they are not saddled with high overhead costs. Their administrators are not paid as highly as bank executives, their staffs are often made up of volunteers, their office space typically is donated or subsidized by their sponsors, and they are the beneficiaries of federal tax exemptions. Most of their earnings from loan interest can be paid out as savings interest to the depositors. In addition, credit unions like banks invest their depositors in certificates of deposit, U.S. Treasury instruments and other investments but do not charge their members the profit margin that is usually built into bank account interest rates. Some credit unions, in addition, offer their members automobile and ground life insurance at economical rates, and some arrange for membership discounts with local merchants.

In reality, however, these benefits are not realized. Not all administration and directors of credit unions have financial credentials and expertise, and the unions’ investment policy may not yield optimal returns. In addition, since depositors funds are the source of loans, and since loan interest is the source of interest payments to depositors, it may not be possible for a credit union to offer both low interest loans and high interest savings account.

As a consequence, at some times auto loans cost less from credit union than they do from local banks, but at the other times the reverse is true. Although credit unions tend to charge a lower interest rate than banks on credit cards, many credit unions allow no interest free period on their cards—that is, interest charges begin the moment the credit card is recorded.

On mortgages, credit unions are likely to offer a few advantages with respect to interest rates. Because, like banks, credit unions sell their mortgages to the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, the rates on these mortgages must be similar to those banks are charging if the mortgages are to be saleable. In addition, the kind of mortgage that you can choose is likely to be limited. On the other hand, loan origination fees and points are likely to be lower, and the down payment required may be as low as 5 percent instead of the 10 to 20 percent demanded by most banks.

On savings account, certificates of deposit, and interest bearing checking accounts, credit unions have been shown to pay higher rates than banks, but these findings come from surveys of large numbers of credit union and do not necessarily hold true for the one which you may be eligible. Some 66 percent of credit for the month or for the quarter. Thus if your balance is $100 on January 1 and on January 6 you deposit $10,000, your interest for the period will be calculated on the basis of $100.

Before opening an account, ask about the method used for interest calculation. Credit unions use the low-balance interest calculation to encourage depositors to maintain stable balances on which the credit union can depend for making loans. But if you use your account actively for the frequent deposits and withdrawals, low balance interest calculation is almost certain to penalize you. If you keep a substantial balance inactive for a long period of time, however, the low balance method will have little impact, but you might enjoy a higher yield from a certificate of deposit.

Some further disadvantages may be important to you. Credit unions do not return your canceled checks with your statement. Instead, each check you write has an attached carbon copy, which you are expected to retain for your records. Although this copy can help you verify your statement, it cannot serve as proof of payment, and getting a copy of your original check may involve delay, extra charges, or both. Some credit unions’ statements quarterly rather than monthly. And not all credit unions are equipped to handle electronic fund transfers—a consideration that maybe important if you use a money market mutual fund. Moreover, most credit unions have only one branch and although some of them have joined regional bank networks of automated teller machines, these single locations may be an inconvenience for both deposits and withdrawals.

Credit unions as an alternative seem to offer a number of advantages over conventional banks, and you may find the concept of a non profit cooperative congenial, but it is important to check whether the credit union that is accessible to you wants or need. You may find it advantages you want or need. You may find it advantageous for loans but not for a savings or checking account. Some of the largest credit unions—those sponsored by large universities or association of government employees—focus on low cost loans rather than high yield savings accounts.

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