Five Times When a Credit Union Isn't Your Friend

There's a lot to like about credit unions.

Many have lower banking fees and higher yields than banks. And since they're member-owned, credit unions usually offer generous membership perks such as free financial workshops or good rates on car loans.

This consumer-friendly service is very attractive, says Tom Glatt, a credit union consultant based in Wilmington, N.C. Credit unions do a good job serving middle-income consumers. After all, credit unions were originally founded to serve small depositors rather than the wealthy. Some credit unions still only offer basic checking accounts and savings accounts. Large depositors and those with complex banking needs may fare better with full-service banks.

Like any business, a one-size-fits-all credit union doesn't fit all, Glatt says. Some credit unions aren't well-managed and you may get better value elsewhere.

Ultimately, credit union size matters for most people. Large and midsized credit unions have deep pockets for financing high-ticket offerings such as mobile banking apps, along with broad product offerings and extended banking hours. For example, Navy Federal Credit Union offers its members 24/7 live service representatives, says Xavier Epps, CEO of XNE Financial Advising LLC in Woodbridge, Va. "When you get that treatment, you don't care about anything else," he says.

But before switching to a credit union, understand the disadvantages first, Epps says. Here are five to consider.

You'll still need to read the fine print. Credit unions aren't generic, says Allan Roth, owner of Wealth Logic in Colorado Springs, Colo. Fees may differ widely, including overdraft fees, he says.

Some credit unions may even switch penalty fees on savers, Epps says. He points to one example. Early this year, an Illinois-based credit union changed its early withdrawal penalties on certain certificates of deposit, or CDs, from 180 days' interest to 365 days' interest. Roth's advice: Read the fine print before signing up for CDs or other products.

Savings offerings may be limited and yield less. Usually credit unions keep their overhead low so they can pay members higher interest rates on deposits. But some credit unions may still have lower yields than banks along with fewer savings and money market account choices, Epps says.

For example, one Washington, D.C.-based credit union's money market account for a $10,000 deposit yielded only 0.4% in early February versus 0.53% for credit unions nationally during the same period, according to Bankrate.com.

Glatt says small credit unions usually have limited offerings. They may offer only one type of savings or money market account without tiered interest-rate offerings. The latter would benefit affluent investors with large deposits.

Tech-savvy members may be disappointed. Half of the credit unions in the U.S. had less than $19 million in assets at the end of the third quarter of 2011, according to the Credit Union National Association, which is based in Washington, D.C., and Madison, Wis. Their small size means they may not be able to finance expensive technology upgrades, Glatt says. As a result, some smaller credit unions aren't able to offer mobile banking apps for your smartphone or mobile deposits, where you can deposit checks just by snapping a picture. Still, most credit unions do offer online banking.

Turn to larger, urban credit unions, such as San Francisco Fire Credit Union, for technology bells and whistles, Glatt says. Many now have charters allowing them to accept members living in the community and not just those working for a specific company or those affiliated with a certain group.

Brokerage services may be pricey, if the credit union has them at all. Some investment products sold at credit unions may not be the best deal. Roth says they may be offered by outside brokers who get access to member data in exchange for sharing profits from investment product sales. These products may be heavily marketed and include costly annuities and mutual funds, he says.

"Credit unions always look for new sources of profit," Roth says. "And investment products are incredibly profitable. However, some of them are the ugliest products I've seen, possibly worse than banks." So, view credit union brokerage services with a skeptical eye, and add up final investment product costs before investing, he says.

Credit unions have few branches for in-person transactions. Consumers who prefer bank branches on every corner will be disappointed. "Most credit unions have smaller footprints than regional banks," Glatt says. Of the nation's more than 7,000 credit unions, 3,000 belong to the CO-OP network, and 1,400 provide shared branching services. But, many smaller ones even have just one location, limiting access to your money.

Bottom line: Credit unions can do things counter to member interests, Roth says. "They don't always act rationally," he says. "So, you still need to shop around."