ThefutureFIT here. I got to work with Conquering Credit this week on this great guest posting. He has a fantastic site that I suggest you check out if you like this article (which you will, I hope.) He references a credit union that gets 3% APY. This is just like mine, which I love, Greater Nevada Credit Union. I have to agree with his conclusion about this issue. Read and see if you do too!
Credit Unions vs. Traditional Banks
Banks are businesses, simple as that. The large ones tend to be publicly traded corporations, like Bank of America, Chase, Key Bank while others (USAA Federal Savings, OneWest, Arvest) are privately held. Some specialize in personal banking, some in business banking, but at the end of the day are all trying to turn a profit off customers through checking, transaction, and ATM fees, or credit cards and loan products.
Credit unions, on the other hand, are member-owned, not-for-profit organizations. Since they’re not in business to profit off of their members (not customers), they can typically offer lower interest rates, high interest-yielding accounts, and less fees on transactions, ATMs, teller services, among other things. Since credit unions are seemingly the underdog here, I’ll write about the major differences in comparison to traditional banks.
Financing and Fees
When financing through a credit union, you’ll enjoy lower costs on nearly all fronts—Auto loans, credit cards, personal loans, and mortgages. The sole reason for this is that they are non-profit organizations and intend to benefit their members, rather than charging higher rates to generate profit.
Credit cards APR can start in the single-digits, which I have yet to see offered by any traditional bank. I have had about equal success in raising my credit limit between credit unions and banks, in my experience. Auto loans tend to be much more flexible and less costly through credit unions; banks near me begin in the high single-digits for APR whereas my local credit union starts at around 1.99%. Banks will also put more restrictions on age of the car model and likely won’t finance a used vehicle.
Mortgages are near an all-time low so there is little difference percentage-wise between a traditional bank and a credit union, maybe half a point. Keep in mind, half a point on a mortgage can add up to big savings over a long period of time. A $200K mortgage over 30 years at 3.99% will cost $343K when making the minimum monthly payment. The same mortgage at 4.49% will come out to $364K… That’s a $21K difference!
Since credit unions are making less money on their loan products above, it’s not uncommon to have more fees associated with your account than at a traditional bank. One of my credit unions actually charges a flat fee for every ACH transaction that is deposited or debited from my account where my bank only charges in the case of a wire. Both institutions can have minimum balance requirements to waive their checking or savings account fees but this is case-by-case. If you don’t have the capital to meet the minimum balance criteria, my advice here would be to go with whatever bank or credit union you can find that does not charge a fee.
One crazy fee I’ve seen is a “teller fee” which is a charge that comes with speaking to a teller at a branch; if your bank or credit union does this, I’d strongly consider moving my money somewhere else.
Interest and Rewards
Because of their not-for-profit status, credit unions are in a better position to offer higher interest yield on their checking and savings accounts. For example, one credit union that I use is Lake Michigan Credit Union, which offers 3% APY on balances up to $15,000 as long as you meet certain qualifications (10 transactions monthly, direct deposit, online banking). You’ll also find that they have some better options for money market accounts and certificates of deposit (CDs). Typically, anything paid out by a credit union comes in the form of a “dividend” because you are technically a member of the union.
Banks paying interest on their accounts normally do so up to 1% maximum, like Ally or Capital One 360, because they are virtual and have no physical locations. There’s little incentive for major banks to pay high interest because they need to be accountable to their shareholders and show profit.
Cash-Back and Rewards
Reward miles and points are major perk of credit and card spending. Miles are redeemable for travel (flights, hotels, rental cars) while points can be used for gift cards, retail purchases, and sometimes cash. These rewards are most often found with credit cards, particularly American Express, because the idea is that consumers will make their minimum payments and pay more in interest than the rewards they’re earning. Banks also have many more opportunities due in part to their partnerships. Credit unions, again, offer much lower interest rates on credit cards so they tend to have weaker incentive programs, if any at all.
Accessibility and Service
Credit unions are generally localized—most of them actually tend to require that you live, work, go to school, or worship in the same county/counties where the credit union is located (unless you give a small donation, of course). With the increased use of online banking this is really a non-issue. Unless you have frequent cash transactions and require face-to-face interactions, I’ve never had issue or needed any facetime with either of the credit unions that I’m a member of.
Banks are likely to be nationwide or even international because of their corporate status. If they aren’t, it’s likely that they will have a sister or international bank that can be used if there are no local branches (as is the case with Bank of America and Barclays United Kingdom, for one). However, with the waived ATM fees that come with credit unions, you could get away without having to pay extra costs.
Because credit unions aren’t under the same shareholder pressure as major, publicly traded banks, they may not be the quickest to update their online or internal systems. A recent example just happened to me last week—a client connected with his credit union representative to send me financial documents for one of his accounts. The credit union sent the statements in a file format that I had never seen before; my IT department did some research and found out the system being used by the credit union was from the late ‘90s!
One of the credit unions that I use requires a three-step authentication process in order to log into my account; the password online, a text or call verification code, and an email verification code. Budget aggregator apps, like Mint, You Need A Budget, and Personal Capital, have made this easier to manage, but it can sometimes be difficult since not all credit unions are compatible.
In my experiences with my credit union, it takes a much longer time to speak with someone over the phone than it does when I call my bank. I can say that out of the many times I’ve called it’s always one of the same three people that answers which leads me to believe that they’re in a local branch and not an outsourced call center, so there’s that. Also, they seem to be very unhelpful when it comes to minor fees that come up on my account, which is discouraging when compared to my bank that has waived every transfer, ATM, or wire fee that I’ve incurred in the past without any question. Again, this is my personal experience with my local credit union and presumably not a national occurrence.
Since I haven’t gone into a branch and met a teller face-to-face, I can’t comment on this. In-person service likely depends more on the individual rep and whether or not they ate their Wheaties that morning.
There are obvious pros and cons to using a local credit union rather than a traditional bank but you might find yourself limited in terms of accessibility. You’ll usually enjoy lower APR through credit unions if you’re financing a car or purchasing a home. Banks will give you higher rewards miles ad cash-back on credit cards, which certainly adds up when making major purchases.
The best course of action, in my opinion, is to make your choice between a credit union and traditional bank when you are first getting your finances in order. Once you start to develop more needs with your financial institution, open an account with the other one so you can reap the benefits of both.
About Conquering Credit
Conquering Credit is a blog run by a 20-something who tackled $40K in student loan debt early on out of college. After working in financing, it became apparent that a large number of Americans are nearly clueless when it comes to personal finance and consumer credit. Conquering Credit was created to provide a resource for those interested in or intimidated by finance.