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Bank or credit union?
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August 14, 1998: 4:20 p.m. ET
Both offer different types of service, so determine how you want to bank
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NEW YORK (CNNfn) - President Clinton closed a chapter in credit union history last week, when he enacted a law that would allow credit unions to add new groups of members.
The new Credit Union Membership Access Act could affect membership requirements at 7,065 federal credit unions. For the past year and a half, these unions have not been able to sign up new groups of members, as bankers fought to restrict credit union growth, claiming that credit unions had unfair tax advantages.
But now that the act has been passed, the National Credit Union Administration, an agency that oversees federal credit unions and its insurance fund, must finalize new regulations on who can join. The process should take between four and six months, said Lesia Bullock, a credit union administration spokeswoman.
Should it matter to you?
Because of the new act, you may be one of many Americans who will soon have the opportunity to join a credit union. But do these organizations offer advantages over your local financial institution?
The answer depends on how you bank.
In simple terms, a credit union is a nonprofit, cooperative financial institution owned and controlled by the people who use its services.
The Credit Union National Association, a trade group, says since credit unions aren't run to please stockholders, they aren't vulnerable to the same demands that the stock market makes on publicly traded banks -- cut costs and boost profits.
Instead, these unions have generally been able to offer lower rates and fees and still operate in the black. They rely on a financial reserve to absorb unexpected losses from loan defaults or other financial setbacks, and the majority of credit unions carry federal deposit insurance that protects individual accounts up to $100,000 in the event the credit union fails.
So why should you join a credit union? The following are some reasons that may peak your interest:
Lower fees and better rates than most banks and savings & loans. Whether you're shopping for a car loan, credit card, certificate of deposit or money market account, credit unions leave banks and thrifts in the dust.
A Bank Rate Monitor survey in July of credit unions, banks and thrifts looked at 50 of these institutions in the top U.S. markets and discovered that credit union rates beat banks by as much as 1.47 percent. Credit cards interest rates drop as low as 13.11 percent at credit unions, compared to a high of 17.90 percent at banks and 16.70 percent at thrifts.
Credit unions are also going after the automobile finance market more aggressively, said Fritz Elmendorf, spokesman for Consumer Bankers Association, a retail bank trade group.
"The larger banks are seeing a lot of market share in this area, but the larger credit unions and the ones being run by ex-bankers are setting up arrangements where a non-member can finance a car right at the dealership just by signing up to be a member," Elmendorf said.
Members own their credit unions. These unions can provide services only to their members and are legally restricted as to whom they can offer membership.
Once these "common bond" provisions are met, a potential member submits an application and buys at least one share (typically $5) to become a lifetime member with full voting rights.
Anyone with a common bond can start a credit union. For example, employees of corporations or members of associations such as the Kiwanis Club or residents of a defined area, such as a town or neighborhood, can start their own.
Despite some of the positives, though, credit unions also come with a handful of cons, such as the following:
Lack of ATM networks. Most credit unions don't have more than one ATM, and some don't have any machines at all, meaning members get hit with surcharges every time they use a bank's ATM. Credit unions in some states have formed no-surcharge ATM networks among themselves. Another problem that comes from not having a large ATM network is that some credit unions charge members for using even their own ATMs, in order to cover maintenance and other costs.
Insurance may not apply. About 3 percent of credit unions aren't federally insured.
No returned checks. At most credit unions, checks are not returned to members, so you'd have to keep a carbon copy for your records.
No help for the poor. Low-income borrowers may have a hard time getting a mortgage through a credit union, according to the Independent Bankers Association of America.
Credit unions are exempt from adhering to the Community Reinvestment Act, which mandates financial institutions serve low-income communities. The bankers association says credit unions rank behind commercial banks, mortgage companies and savings institutions in providing mortgages to low-income borrowers.
Dealing with more than one bank. Because of the limited financial products and services at some credit unions, customers may be forced to split some of their business with a bank.
Things to think about
Before giving banks the boot, consider how many financial transactions you make each month as a gauge for choosing a credit union, advises Michael Kidwell, vice president of Debt Counselors of America.
For example, if you wrote ten checks one month and used the ATM 15 times with an account that charged a $7 monthly fee and 30 cents per ATM transaction, it would cost $11.50 a month, or $138 a year.
In other words, compare fees.
"Some credit unions may not offer things like safety deposit boxes, cashier's or certified checks," Kidwell said. "We've actually had clients who weren't able to get those type of checks from their credit unions."
If you're considering a credit union, keep tabs on the number of checks written and how often you use the ATM. Banks usually will allow a certain number of transactions per month before the fees hit. Another consideration is whether money deposited in a credit union account will earn enough additional interest to offset ATM fees the credit union may charge .
Finally, does the credit union require a smaller balance but provide the same level of service and convenience as a bank? One usually overshadows the other, Kidwell said.
Finding a credit union
Bank-weary account holders have several avenues if they want to join a credit union. Start with CUNA, which has the listing of each state's credit union league.
Employees should also check with the personnel department to find out if their employers sponsor a credit union or is a select employee group, or SEG. These are groups of people who don't have the resources or numbers to form a credit union on their own. Some employers may even offer direct deposit through a credit union.
Ask family members if they're members. Most credit unions allow relatives to join, but it may be limited to immediate family.
There may be a credit union in the neighborhood that's defined by a geographic boundary. Ask your neighbors.
Finally, check, the phone book for a listing of credit unions.
With its next official meeting Aug. 31, NCUA is pleased at the grassroots effort that helped to push the Credit Union Membership Access Act through Congress.
"It's a clear example of how Americans can affect the legislation system," Bullock said. "It's been wonderful to witness."
--by Bank Rate Monitor for CNNfn
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