This is the first in a series of articles on the U.S. banking system. Each article will cover one type of financial institution that engages in banking. The first article covers credit unions. Future articles will cover savings and loan associations and several types of banks.
What You Need to Know About Credit Unions
For more than 100 years, credit unions have been providing financial services to their members. Forget about what you thought you knew about credit unions. Long gone are the days when credit unions were seemingly only a "bank" for government employees. Today some 100 million Americans are member-owners of 6,900 credit unions and credit unions have more than $1 trillion in assets.
The Credit Union National Association (CUNA) defines a credit union as a non-for-profit, member-owned financial cooperative, democratically managed by its members, and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members.
Simply put -- credits unions are about their members, not profits.
Who’s watching the money?
If you’re wondering, if it’s not a bank per se, how safe is your money? Relax, they are regulated. State-chartered credit unions are regulated by their state credit union regulator. Federally chartered credit unions are regulated by the National Credit Union Administration (NCUA), which is an independent federal agency charged with regulating, chartering, and supervising credit unions. In addition, the NCUA also has a safety soundness role with regard to all credit unions that are insured by the National Credit Union Share Insurance Fund (NCUSIF).
Almost all credit unions are federally insured by the NCUSIF which is pretty much like the FDIC for banks. About 2% are privately insured. If you want to check whether your credit union is federally insured, look for the "seal of approval" of sorts, the NCUSIF insurance sign in the branch. The NCUSIF’s standard share insurance amount is $250,000 per share owner.
How are credit unions different from banks?
"They are structured very differently. Credit unions don’t issue stock or pay dividends to outside shareholders, so they are not beholden to outside third party interests," says Steve Rick, chief economist of CUNA Mutual Group, an insurer and maker of financial productions within credit unions.
Each person who holds an account is a member, and each member has one vote, "rather than the voices of only the powerful few stockholders heard at for-profit banks. And all earnings go straight back to members in the form of favorable interest rates and lower fees that other for-profit institutions can’t beat," he adds.
Banks are governed by paid shareholders and voting rights depend on the number of shares owned. Earnings go to outside bond and stockholders in the form of dividends.
As cooperatives, credit unions are part of a broader cooperative community that shares philosophies around benefiting their member owners. One of the core missions of the credit union system is to educate its members on financial issues to ensure their financial health.
"It’s worth noting that credit unions can offer creative types of mortgages that should be explored by first-time and experienced homebuyers alike. The PenFed Credit Union, along with some other credit unions, has a 5/5 ARM that adjusts every five years. A product like this combines aspects of a fixed rate mortgage (fewer, but not the fewest) surprises about payment sizes, with aspects of an ARM (lower, but not the lowest) interest rates," says David Reiss, a Brooklyn Law School professor specializing in real estate.
NEFCU boasts that its Go Green checking account has no minimum balance requirements or monthly maintenance fees and that members can earn up to a 3% APY – three times the next best rate offered in the marketplace, and 5 to 10 times what is offered by commercial banks.
Does size matter?
Although the average size of a bank is more than double that of a credit union, and the top four banks in the U.S. each have more assets than the entire credit union system, according to CUNA, most credit unions participate in a collaborative nationwide network of over 30,000 surcharge free ATMs and 5,000 service centers.
Increasingly, credit unions have mobile banking capabilities such as remote check deposit. "It’s practical for members to maintain a relationship with their credit union even if they move from one city to another, or across the country," says Santo Cannone, Chief Product Officer, Credit Union Solutions, Fiserv.
However, some credit unions may not have all the bells and whistles of the biggest banks. "They may not be as technologically advanced," says Robert Ashbaugh, senior risk management consultant for Sageworks. "The depth of product offerings may be limited," he adds.
Is smaller better? Says Rick, "Credit unions are ranked #1 in customer service across all industries by Consumer Reports, and that is echoed across many other rankings."