Financial Planning for August 2005

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Is a Credit Union for You?
Have you ever heard a friend talk about getting a better loan rate from their credit union or perhaps getting a higher return on their savings account from the credit union than the rate you get at the bank? If you have, did you bother checking out what kind of rates you can get at your credit union? Uh, what’s that you say? You’re not a member of a credit union? You didn’t know you could be a member of a credit union? You don’t even know what a credit union is?

If any of the foregoing is true of you, don’t feel bad. There are millions of Americans who have no idea what a credit union does. It’s not all that surprising since credit unions have traditionally been closed to the general public. In fact, until recently, availability of membership in most credit unions was limited to a select group of people with common characteristics like working for the same company, being in the same union, etc. With the advent of "community based" credit unions, more people have access to some of the advantages of a credit union.

So, what is a credit union? It’s much like it sounds. A credit union is the joining together of a group of individuals to form a "union" of sorts, which gives access to credit to the members of the union. It is member directed and many times does not pay income taxes. Because of this, a credit union can offer a higher return on your money while minimizing the rate you must pay on loans.

The purpose of a credit union is also a bit different than that of a bank. Banks are generally run by boards of directors who are controlled by shareholders. Many times, these shareholders are not depositors in the bank. Credit unions are owned by the members. The members, instead of being independent of the credit union, are also the depositors. This gives management all the incentive it needs to maximize return to the depositor-member-owner through higher savings rates and lower loan rates.

So, does a credit union sound like a place where you want to do business yet? Your answer should be a qualified "yes," but don’t put your money in one just yet. While credit unions have their pros, they are also businesses that sometimes get into trouble. That’s why you need to look at the same things you would in a bank. Your first question, therefore, should be, "Is the credit union on sound financial footing?" This question brings up one important point for you to remember - deposits in credit unions are insured the same way deposits in other institutions are. Still, the better the financial condition of a credit union, the better service it will be able to offer, so do your research.

Research is just as important when choosing a credit union as it is in choosing a bank. Talk to your friends who are members of a credit union. Find out their experience with the credit union. Did they make more or pay less as a result of their membership? How easy was it to become a member? Is the credit union tied to a specific group or is it community-based (i.e. can anyone in the community become a member)? Are the rates equal to or better than what the bank will pay? Will the credit union be as accessible as the local bank? Because the credit union is often limited in size, its services and branches are often limited in number. This means that the credit union will be unsatisfactory for many customers.

Choosing a depository institution is a critical decision in your financial life. If you like convenience, you may find a local bank with numerous branches more to your liking than a credit union that typically has few locations. If return is all you are looking for, a credit union may serve you better. Take a look at your needs prior to investigating a particular institution and then ask questions based on those needs. Only through good research will you be able to make a wise decision.

Have a super August.


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