The Downside of Credit Unions

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credit unionCredit union membership is at an all-time high, and much of its growth is likely a product of our rising disillusionment with traditional banks. Banks, after all, are run by executives aiming to enrich stockholders (and themselves), while credit unions are owned by, and run for the benefit of, their members/depositors.

Indeed, according to the Credit Union National Association, 1.3 million people joined credit unions last year, and reaped the benefits. Credit unions tend to offer more affordable services, and lower interest rates, than banks. This infographic from IBM Southeast Employees' Federal Credit Union compares the difference in average national rates (albeit not the latest available) and credit union rates. For example:
  • 36-month used-car loan: 3.7% for credit unions, 5.47% for banks
  • 30-year fixed-rate mortgage: 4.29% for credit unions, 4.2% for banks
  • 3/1-year adjustable rate mortgage: 3.36% for credit unions, 3.54% for banks
  • Classic credit card: 11.64% for credit unions, 13.22% for banks
See the whole infographic at the bottom of the article.

Moreover, these not-for-profit institutions earn high marks in customer service. According to Temkin Ratings, in 2012 credit unions topped all major (and many minor) banks in overall customer experience.

However, before you move your banking business to a credit union, be aware that there are drawbacks that, although they may seem minor, may make you think twice about migrating.

You may not be eligible to join one. In the past, credit unions mainly served people with a certain affiliation, such as to a particular employer or association. Today, though, restrictions are not as tight, and there are many community-based credit unions, too. There are more than 7,000 credit unions, in fact, in America. But you'll still have to shop around to see if you can clear the eligibility hurdle before passing "Go."

They don't always offer as many features as big banks. Credit unions may not employ the latest technology, such as apps that allow you to pay bills on your smartphone. Also, you may not enjoy as broad an ATM network -- though many credit unions have begun to share access with other institutions to offer members better access to banking services.

Their credit cards typically offer lower rewards. With a little digging at a site like bankrate.com, you may be able to find a credit-union credit card that offers decent rewards. Still, most big banks tend to be more generous with points and other reward card perks. The key is to watch out for fees. You may be able to make up the difference in the rewards by paying lower fees for your credit-union banking. However, even credit unions have been hiking some fees, though, so it can pay to shop around. And don't be surprised by future fee increases.

Despite those drawbacks, a credit union can make a lot of sense for many consumers. For more help finding out if a credit union would be a good fit for you, see:

Motley Fool contributor Selena Maranjian holds no position in any company mentioned.



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The Downside of Credit Unions

BOK (BOKF) is the smallest bank on the list with a $3.8 billion market value and $26 billion in assets. The bank holding company is based in Tulsa, Okla., but its branches operated under several names in other states: Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas and Colorado State Bank and Trust. BOK is worth about 12.5 times earnings and is valued at 1.3 times book value. The return on equity is 11%, and it offers a 2.7% dividend yield to the common holders. Shares are trading around $56.00, and Wall Street analysts have a target above $59.00.

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Photo: Les Stockton, Flickr.com

KeyCorp (KEY) is the one exception in our list to our rule about share prices under $10. Its other metrics more than make up for this. It has a market cap of just $7.12 billion against some $87 billion in assets. It operates in 14 states throughout the Rocky Mountain, Northwest, the Great Lakes and Northeast regions. To make its appearance on this list even more impressive, KeyCorp is headquartered is in Cleveland, where a large number of now-troubled loans were issued. The bank has a return on equity of 9.2% and pays out a 2.7% dividend yield. Shares trade around $7.50 but have a target price of $9 from Wall Street.

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PNC (PNC) is based in Pittsburgh and has almost $300 billion in assets, with over 2,500 branches and almost 7,000 ATMs in 14 states. It has a market cap of $31.01 billion, and its stock is valued at 10.6 times earnings and at less than 0.9 times book value. The return on equity is 8.9%, and the company pays out a 2.73% dividend. Shares are trading at under $59, but Wall Street is eyeing a price of $70.50. PNC was even strong enough financially to close its National City acquisition at the end of 2008 when there was so much fear in the financial markets. PNC also owns almost a quarter of the great asset-management firm BlackRock (BLK).

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M&T Bank Corporation (MTB) is based in Buffalo, N.Y., and now has more than $79 billion in assets. Excluding any small purchases made recently, M&T had nearly 700 branches, 2,000 ATMs and a presence in eight states. The market cap is $10.12 billion, its P/E ratio is 12.7, and its price-to-book value ratio is only 1.07. M&T has a return on equity of 9.5% and pays out a dividend of 3.5% to common stockholders. The stock is trading just north of $80 a share, but analysts have set a target price of about $90. Berkshire Hathaway owns almost 5.4 million M&T Bank common shares worth more than $400 million.

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Photo: Afagen, Flickr

U.S. Bancorp (USB) is often overlooked as a money-center bank because it is a super-regional located in Minneapolis. But it's the fifth-largest commercial bank in the United States and caters to millions of consumers. With $341 billion in assets, more than 3,000 branch locations and more than 5,000 ATMs, its operations are spread out over 25 states in America. Berkshire Hathaway owns some 69 million shares worth more than $2.1 billion. The bank's market cap is $59 billion. It is worth about 10 times earnings and 1.6 times book value. The return on equity is very high at 16%, and it offers a 2.5% dividend yield to the common holders. Shares are trading around $31.50, and Wall Street analysts have a target of about $34.25 on this great, safe bank.

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Despite the media attention surrounding the JPMorgan's (JPM) multibillion-dollar trading loss, the firm is still in good shape compared to many of its peers. It has a fortress-like balance sheet with about $2.3 trillion in assets, and CEO Jamie Dimon has said the only thing that could lead to the bank's failure is a collision of the Earth and Moon. Despite a share price decline following news of the "London Whale" trading loss, the company still has a sizable market cap of $135.17 billion. Shares trade at less than 8 times earnings and only about 0.7 times book value. The return on equity is 9.8%, and the company pays a dividend yield of 3.4% on the common stock. While the bank shares are trading at just over $36, analysts value the company at $47 a share.

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Wells Fargo (WFC) is the undisputed safest bank in America now that JPMorgan Chase & Co. (JPM) has come under scrutiny -- even if Chase has about $1 trillion more in assets. With some 6,200 storefront branches, more than 12,000 ATMs and an asset base of over $1.3 trillion, it has a presence in almost every state. Warren Buffett's Berkshire Hathaway owns close to $13 billion worth of the common stock, and his stake keeps rising. The market cap is a whopping $171 billion. The shares trade at less than 9 times earnings and at almost 1.2 times book value. The return on equity is just above 12%, and it offers a 2.7% dividend yield to the common holders. While shares trade at around $32.50, Wall Street analysts value the bank at almost $38 per share.

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How Do Credit Unions Stack Up To Big Banks [infographic by IBM Southeast Employees' Federal Credit Union]
Infographic
by IBM Southeast Employees' Federal Credit Union
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