Between the public outcry over Bank of America's (BAC) new fees and the Nov. 5 "Bank Transfer Day" event that has spread virally over the past few weeks, normally low-profile credit unions have been receiving a great deal of attention as an alternative to the big banks.
However, this publicity has also exposed a number of false but commonly held beliefs about credit unions. Because the movement has changed enormously over the past few decades, some of these myths reflect the realities of an earlier time, while others are simply misconceptions or misunderstandings. Whatever their sources, such beliefs often lead consumers to overlook the credit union option.
As such, I've decided it'd useful to dissect a few of the most common credit union myths.
Myth No. 1: Only employees of certain workplaces are eligible to join credit unions.
This was true in the early years of the movement, when membership in a credit union was legally restricted to people with a tight "common bond." At that time, credit unions usually consisted of a few hundred to a few thousand members who all might work at the same factory, attend the same church, or belong to the same fraternal club.
Over time, such restrictive requirements have been gradually loosened at both the state and federal level. As a result, many credit unions have converted to "community charters," which generally extend membership privileges to anyone who lives, works, worships, or goes to school within a defined geographic area. This means that virtually everyone in the United States is eligible for membership in one or more credit unions; you can find a useful tool for locating one near you at the Smarter Choice website.
Note: Don't be discouraged by the name of a credit union; many retained their original names even after converting to community charters. For instance, to be eligible for the Vermont State Employees Credit Union, one need only live, work, or go to school in Vermont.
Myth No. 2: Credit unions are great places to stash savings but offer fewer services than banks.
This is another common belief about credit unions that is rooted in their history, but not true today. Early credit unions were primarily run by volunteers on a shoestring budget, with limited hours of operation and few services beyond deposits, withdrawals, and small consumer loans (although they did pioneer the now common practice of direct deposit).
Nowadays, credit unions provide many of the same financial services as banks, including checking accounts, debit and credit cards, online banking and bill pay, IRAs, mortgages, car loans, etc. While business lending is still restricted by law to no more than 12.25% of a credit union's portfolio, they are definitely full-service institutions when it comes to personal finance.
Myth No. 3: Credit unions are great for local banking, but the lack of nationwide branches is a big inconvenience.
While it is true that (because of legal restrictions) no credit union has its own branches and ATMs available across the country like a Bank of America or Wells Fargo (WFC), this is not actually a big issue because of the existence of the Credit Union Service Centers network. If your credit union is a participant, then you can do your business at any one of the thousands of participating credit unions' branches around the country, as well as at VCOM units at 7-Eleven stores. With the network's recent release of the "Find Branch" iPhone app, locating a member credit union has never been easier.
Additionally, as one of the ways they return their profits to their members, some credit unions choose to rebate a certain number of non-network ATM fees to their members each month. Given these resources, banking on the go as a credit union member is simple and usually free.
Myth No. 4: If I use a credit union rather than a bank, my savings won't be guaranteed by the FDIC.
While this is technically true, it is only because credit unions have their own self-funded (but still federally guaranteed) deposit insurance fund through the National Credit Union Administration. It covers deposits up to the same level as the FDIC. As such, credit union deposits can be considered at least as safe as those in a bank.
Myth No. 5: Credit unions require new members to pay a fee to join.
As consumer cooperatives, credit unions generally require that members buy a "share" when they open an account, which is usually priced a between $5 and $25. Ownership of this share provides full membership rights to the credit union, and interest is usually paid at a rate on par with a savings account. Maintaining this balance is required in order to be a member of the credit union, but, unlike a fee, the full sum is refunded upon the closure of the account.
Matt Cropp does not own shares of any companies mentioned. The Motley Fool owns shares of Wells Fargo and Bank of America. The Motley Fool has a disclosure policy.
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