While a handful of large, well-known banks appear to dominate the banking landscape, and smaller community banks are often touted as the only alternative, the truth is that there's a third option used by more than 91 million Americans.
Credit unions are becoming increasingly popular, and with more than 7,000 of them across the U.S., consumers have a lot of choices. But is a credit union right for you?
Consider these five types of consumers who routinely join credit unions.
College Students Learn About Finances
Even if they had a checking account or savings account as kids, most college students are still relatively new to managing their finances. Oftentimes, that means they don't get the best deal from banks, says John Iglesias, CEO of Salal Credit Union in Seattle.
"College students often don't have much of an income or an extensive credit history, so larger financial institutions may characterize them as risky, and that likely means higher fees on products," Iglesias says.
According to Iglesias, some credit unions are specifically set up by schools for students, and their business model is geared toward working with younger customers who might not keep a very high balance in their checking account.
But Shay Olivarria, author of "10 Things College Students Need to Know About Money," says credit unions also offer a real advantage to college students because they can be more forgiving if you make a mistake.
"There's a focus on financial education with credit unions, and college students have more of a support system in terms of learning about money," says Olivarria.
Consumers Worried About High Fees
Consumers flock to banks offering free checking. But Todd Pietzsch, public relations manager for BECU in Seattle, says consumers should remember that banks have an incentive to seek profit by requiring a minimum balance or charging high fees for overdrafts.
"As a member-owned, not-for-profit cooperative, a credit union is not motivated by charging," says Pietzsch. "In general, (overdraft) fees are going to be lower at a credit union than at a bank, and credit unions typically do not discriminate by charging additional fees based upon the average balance of the account."
While some credit unions do charge monthly fees, the cost may still be worth it. According to Bill Cheney, president of the Credit Union National Association, an industry trade group, 80% of credit unions offer checking accounts with no minimum balance. And mistakes also cost consumers less. Fees assessed for insufficient funds average $25 for credit unions, while banks charge about $10 more on average, says Cheney.
Overdraft fees might not be assessed at all because many credit unions allow their members to automatically apply funds from their savings account to any overdrafts.
Credit Card Holders
If you're in the market for a credit card, the price you pay for your plastic in annual fees and interest rates is often going to be determined by your credit score. But according to Daniel Penrod, a senior industry analyst with the California and Nevada Credit Union Leagues based in Ontario, Calif., customers who opt for bank-issued credit cards are likely paying more.
"In an apples-to-apples comparison, credit union card rates tend to be a full percentage point lower than their banking counterparts," Penrod says. "But, for those with damaged, little or no credit, the difference can be 5% to 10%."
According to Penrod, one key factor that helps keep credit union interest rates down is that federal law requires all federally chartered credit unions to cap credit card interest rates at 18%. But if you're dealing with a state-chartered credit union, it's possible for the rates to exceed 18%, says Pietzsch. Still, most experts agree that no matter what the cap is on rates, credit unions typically pass along much better deals to their members when it comes to credit cards.
If you're in the market for a mortgage loan or a refinance, you likely won't save a ton of money by going through a credit union, Penrod says. Regulation in the mortgage industry means that most lenders offer very similar rates and products. But that doesn't mean you shouldn't check with your credit union before you shop around for a new mortgage loan.
"Most credit union loans are originated to hold," Penrod says. "That means (the loans) are put on the institution's balance sheet, so credit unions look to get members into loans they can afford to repay."
But there's another reason credit unions are an attractive option for borrowers. According to Penrod, credit unions typically need to distinguish themselves in the mortgage market by competing on service, which means the borrower will be able to work with the original lender for the life of the mortgage loan. If something goes wrong, the borrowers have a much better chance of working with the original lender who understands their financial situation than with a mortgage servicing company that bought the loan, says Penrod.
Worried About Big Banks
Recently, Nancy Schimmel, a songwriter in Berkeley, Calif., joined a local credit union after closing her account with a large national bank.
"My motivation for changing was political," says Schimmel, citing concerns about the role large banks played in the 2008 financial crisis. "With the credit union, the money stays in my hometown and gets loaned to people like me."
Bill Stavros, vice president of marketing at Proponent Federal Credit Union in Nutley, N.J., agrees that the operating structure of a credit union can be especially appealing to politically conscious consumers.
"Credit unions are owned by our members and do not answer to stockholders whose main concern is profit," says Stavros. "This gives credit unions the ability and responsibility to make prudent decisions based on what is in the best interests of their members."
But good politics can be synonymous with good financial decisions. According to Stavros, a credit union's not-for-profit status means that profits are reinvested back into the business to benefit members in the form of cheaper services, lower interest rates on loans and credit cards, and higher rates on savings accounts.