Why Credit Unions Are Better Than Banks

 

 

 

 

 

Laughing All the Way to the Credit Union

Today’s blog falls into a different category than previous blog posts.  In this blog, we are venturing into the world of money management tips and advice.  In the past, the blog has focused less on specific money tips and more on the aspect of how to think about your money.  The reason for that is you can get online and google just about anything relating to money management specifics.  I don’t want to be the blogger that does the same old thing about what fees you shouldn’t be paying or how to eat for a week on $10.  I’m not saying those types of blogs aren’t important, I’m just saying they are pretty well covered.  Instead, I’m going to save my “money management tips” blog posts for things I think are a little off the beaten path and can really help people in a practical way.

 

That brings me to this week’s topic, credit unions vs. banks.  You may be saying to yourself, “they are six of one and half dozen of the other and besides, who cares?”  The truth is, they are not the same thing at all and you should care about the differences because they impact you more than you know.  Let’s start with a fun little history lesson, shall we?  Yay, history!!

 

Raise your hand if you’ve ever heard of the Great Depression.  Remember learning in school about the stock market crash on Black Tuesday, October 29, 1929?  The biggest economic depression in America lasted a good ten years, until FDR and World War II pushed the industrial complex into motion.  Lots of people who have multiple economic and finances degrees have argued for years about what caused the Great Depression.  I couldn’t begin to say I understand it entirely, as I am not an economist.  However, I am a bankruptcy attorney and I do know one thing for sure, banks played a huge role in the Great Depression. 

 

As the economy disintegrated, the banks that survived the initial bust began to stash cash and stop loaning money, the same thing that happened in the recession of 2008.  This practice, as we all know, made things worse!  It was born out of a need for self-preservation.  Why?  Because banks are profit driven.  They needed to maintain solvency and capital in order to stay in business, which required reducing their bad debt load and adopting very conservative lending practices.  Not that I’m advocating lending money at the drop of a hat, but I digress.

 

The role of banks in the Great Depression was so significant that the federal government enacted legislation to try to keep something similar from ever happening again.  One of those acts was the Glass-Steagall Act of 1933, which said banks could not operate as both commercial and investment banks at the same time.  Oh, by the way, that legislation was basically gutted in 1980 and 1999.  Hello 2008 economic recession!  That’s also a topic for another time.

 

The second important piece of legislation involving banks was enacted in 1934.  The Federal Credit Union Act was enacted to create a banking system that was “not for profit” and as such, designed to prevent another banking crisis like the one that occurred during the Great Depression.  If you bank at a corporate bank, designed to provide a profit for its shareholders, I would strongly encourage you to reconsider and move over to a credit union instead.  Here’s a few reasons why:

1. Higher interest rates on investments and lower fees on accounts. Since they are “not for profit” organizations (which is different than non-profit, just fyi), they can afford to pay their customers higher interest rates on checking and savings accounts, money market accounts and CDs.  They can afford to give better rates on loans and credit cards, too.  Also, they can afford to keep most basic banking transactions low cost, or even free.  Banks, on the other hand, would charge you for simply standing next to an ATM, if they could get away with it.
2. Credit unions, by definition, are member owned and managed. That’s why a savings account at a credit union is called a “share” account.  When you make your initial deposit into your savings account, you have invested in the credit union making you a member-owner.  The balance of your share account (meaning your savings account), represents your ownership of the credit union.  See?  Also, the members elect the board of directors who are responsible for running the credit union.  Typically, this results in a “local” organization which, along with the “not for profit” nature of credit unions, means less of a chance of big bank cronyism. 
3. Credit unions can only be credit unions. This means they can only operate as individual or corporate credit unions.  They cannot operate as investment banks or insurance companies.  They exist to serve their members, not to make a profit for their shareholders.  In other words, they are not allowed to speculate on investments with member deposits, for example.  Don’t forget the S&L crisis of the 80s and 90s!
4. Better customer service! Credit unions are by far, much better at customer service than the big corporate banks.  Why?  Because they are typically local organizations and not nationwide corporations.  Their customer volume is lower, giving them the opportunity to deal with fewer customers and resulting in better service, overall.  I’m a member of my local credit union and have been for years.  I have always been impressed with their consistency and customer service.  They get to know the people who are members and as a result, they treat them better.  This also creates an environment of flexibility.  If your credit union can help you out, based on a longstanding personal relationship, they are more likely to do so than a big box, corporate bank.
5. Deposits in federal credit unions are insured to $250,000 just like FDIC covered banks. This one is pretty much self-explanatory.  Your deposits at federal credit unions are insured through the National Credit Union Administration in the same amount as FDIC insured accounts.

 

These are just a few of the benefits of credit unions over banks.  Of course, there are some downsides, too.  One downside is that credit unions in your area might not be open to everyone.  There might be requirements to becoming a member that you do not satisfy.  However, credit unions are gaining in popularity so, do your research and I’m sure you’ll find one that works for you.  Another negative is your online banking, ATM or branch options may be limited with a credit union.  Corporate banks have more money, so they can provide more bells and whistles like robust online banking, better reward programs on credit cards and more ATMs or branches.  Finally, remember that state credit unions may privately insure their deposits.  You’ll want to check on that before joining the credit union of your choice. 

 

Even though there are downsides to joining a credit union, they are minimal in my opinion.  These things, like more ATMs and the ability to deposit checks online, matter very little to me when weighed against the savings I get in monthly fees and the amount I get paid in interest on my accounts.  I also get the added benefit of feeling like my money is with an organization that’s purpose is to serve its members, rather than make money for its shareholders.

 

And so, we come to the end of the first money management tips blog.  The Dollar Lama and I would like to thank you for sticking around and learning probably more than you wanted to know about the Great Depression and the role it played in the creation of credit unions in the U.S.  If you want to know more about our money management philosophy, don’t forget to sign up for our newsletter (coming soon!), and like us on Facebook.  Also, don’t forget to check out our online courses for info on budgeting and DIY credit repair.  Stay tuned for more!

Sincerely,

Joy Alford-Brand

Your Dollar Lama