What to look for – and watch out for – as you look around.
Moving your money to a smaller, better bank has become a trend. You can attribute it to poor service at the larger institutions, the promise of higher interest rates or more flexible business lending standards elsewhere, or even the Occupy movement. So what do you look for when you are shopping for a bank or a credit union? First, let’s detail the differences between the two.
How CUs & banks differ. A retail bank is a for-profit institution, and a credit union is a not-for-profit institution. A bank is owned by its shareholders; a credit union is member-owned. Any decent bank is a member of the Federal Deposit Insurance Corporation (FDIC); any decent credit union is a member of the National Credit Union Administration (NCUA), also a federal agency. Both insure deposits up to $250,000.(1)
Retail banks make a profit by using the money of depositors to make loans at greater interest than they pay to customers. They make even more money through fees, commissions and penalties.
Credit unions pledge to put customer service before profit motive. Even so, they are managed just like banks (though their boards of directors are made up of volunteers). Banks offers their services to the world at large; credit unions offer services only to those meeting eligibility requirements. You may qualify to join a CU because of your employer, your industry, a union or guild membership, or even your home address.
Upsides & downsides. Banking with a behemoth carries some advantages. ATMs and branches are convenient, products are plenty and varied, mortgage rates may be lower than at a CU, and you may even be offered cash bonuses and perks. (Who knows, high-yield savings accounts may even return in the coming years.) The downside: you could face out-of-control fees and relatively tight lending standards.
Small credit unions can ably compete with big banks. In fact, today many credit unions are offering better interest rates on savings accounts, money market accounts and long-term share deposits. Fees on credit cards and terms on auto loans may be better as well. However, a credit union may not offer you the same array of services and products that you find at a big bank, and some still have only one or two branches (though with the expansion of credit union networks, regional and nationwide access to money has really improved for CU members).(2)
Between the big bank and the credit union, you have a middle ground – the community bank, or the mutual bank as it is known in the Northeast. This is a bank owned by depositors, usually run with a conservative management and investment philosophy. These banks can prove vital to small businesses: lending decisions are made locally by people who know the community and its business climate.
If you are among the consumers shopping for a bank or a CU, inquire about these fees. Are they too numerous or too onerous? Then head elsewhere.
Account fees. Major lenders charge these “maintenance” fees largely because they can – “maintaining” your account is not financially taxing for a big bank. Occasionally, they are absent or waived as a reward for sufficient deposit activity, debit card usage or online banking. More often, monthly account maintenance fees may run $5-25.
Minimum balance requirements (balance fees). Many lenders will hit you with a monthly fee in the range of $5-20 if your savings or checking account diminishes below a set dollar amount.
ATM fees. Don’t forget the common $2-3 fee for withdrawals from third-party ATMs.
Overdraft fees & returned items fees. $20-40 penalties are not unheard of when you overdraw your account, or leave it overdrawn for a period of time.
Application fees. When you apply for a mortgage or a business loan, there may be a loan origination fee or “processing fee” of $20-100 involved.
Service fees. Need to check a deceased accountholder’s balance? Make copies of deposit slips? Set up online banking? Obtain a reference letter pursuant to an international visa application? You name it, there’s typically a fee for it at a big bank.
Commissions. A big bank’s investment division may be modeled on a full-service brokerage, with commissions and fees exceeding those of discount brokers.
The good news is that you may be able to dodge some of these fees. Just about any bank will still give you free checking if you sign up for additional services such as a direct deposit arrangement. Many online banks will actually reimburse you for ATM fees. Finally, perhaps the best thing about credit unions is that they haven’t yet dreamed up fees for everything under the sun.(3)
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