You may be frustrated by the Federal Reserve’s plans to keep interest rates low on savings accounts and CDs through mid-2015, especially if you’re near retirement and will be living on a fixed income. On top of that, many banks are slapping on all kinds of new fees. So you might want to consider joining a credit union, a member-owned financial cooperative, as 1.3 million people did in the first half of 2012.
Before you become a credit union member, however, there are five things — three advantages of the institutions and two cautions — you should know:
1. Anyone can join a credit union. It’s true that credit unions have membership requirements. At one time, you had to work for an affiliated employer or you weren’t eligible to join. These days, however, it’s much easier to become a credit union member. In fact, you might be surprised at some of the credit unions that will accept you.
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For example, one of the credit unions I belong to is Pentagon Federal Credit Union, which describes itself as serving members in the Air Force, Army, Coast Guard, Department of Homeland Security, Department of Defense, defense-related companies and the Veterans of Foreign Wars. I don’t fit into any of those categories, but I was able to become a PenFed member after paying a one-time $20 fee to join the National Family Military Association, a nonprofit group open to “anyone concerned with the well-being of military.”
Though not all credit unions make enrolling this easy, most want your business and will find a way to get you to qualify. Kiplinger recently published an article called “7 Great Credit Unions Anyone Can Join” that’s worth checking out. You can also visit culookup.com or asmarterchoice.org to search for credit unions you may be able to join.
2. Generally speaking, interest rates are higher on savings and lower on loans at credit unions than at banks. Credit union ATM and checking fees are often lower than what banks charge, too.
Recently, although the national average rate for bank CDs was 0.31 percent, many credit unions were paying much more — five offered 0.85 percent or higher (of course, some banks also pay much more than the national average). Incidentally, the National Credit Union Administration, a federal agency, backs deposits of up to $250,000 with the full faith and credit of the U.S. government, just like the Federal Deposit Insurance Corporation does for bank deposits.
The reason for the differences in the rates and fees is that credit unions are nonprofits, so they don’t have a bank's expenses, such as income taxes or paying dividends to shareholders. Not surprisingly, this advantage is universally resented by bankers. Many bank presidents I’ve spoken with believe it’s unfair that they must compete in a not-so-level playing field. Although they have a good point, I’m still going to put my savings in the federally insured institution that gives me the highest rate.
To find the highest savings rates, I go to depositaccounts.com, a site that tracks savings accounts and certificates from banks and credit unions. You can also compare credit union rates for savings accounts, CDs and loans at the credit union area of bankrate.com.
3. You can access your credit union through ATMs across the nation. I’ve found that many people are afraid of leaving the big banks because they think they’ll have trouble finding ATMs for their credit union accounts. In reality, many credit unions belong to the Co-Op Network, a confederation of 28,000 surcharge-free machines across the U.S. and Canada, including ATMs at retailers such as Costco, 7-Eleven and Walgreens.
4. Credit unions sometimes offer the worst investment products. I belong to about 10 credit unions and often get solicited by their investment departments. They’ve frequently encouraged me to buy expensive annuities and high-fee mutual funds that I wouldn’t recommend to my worst enemy.
I’ve spoken with executives at these institutions and learned that the advisers who pitch those pricey investments don’t technically work for the credit unions. Often, investment firms are given space in credit union branches and access to member data in exchange for sharing profits from their product sales with the credit union.
A couple of credit union CEOs have told me they’d never allow an inappropriate product to be sold to their members. But what’s inappropriate is subjective.
So before signing up for any investment at a credit union, make sure the adviser lays out the total costs and you fully understand the product.
5. Credit unions don’t always put members first. While I’m a fan of credit unions, that doesn’t mean I’m going to place complete trust in them.
For example, a few months ago Citizens Equity First Credit Union retroactively changed its early-withdrawal penalty on its members’ CDs. I investigated this action and found that buried in Section 14, on page 22 of the deposit-account agreement was the right for the credit union to change terms of existing CDs.
My advice: Always read the fine print on CD documents at a credit union (and at banks, too) to make sure the institution doesn’t have the unilateral right to change penalties or other terms after you’ve bought the savings product. Otherwise, you could face an unpleasant surprise someday.