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Credit unions can be a good place for your finances, especially when it comes to loans. Unlike banks, they are owned by their members and are nonprofits so can be more flexible in the interest rates they charge. However, like many things in life there are some downsides to using a credit union for your checking accounts, credit cards and loans.
They have more latitude
For one thing, credit unions have more latitude than banks for collecting on unpaid loans. This is due to a concept called cross-collateralization. What this means is that if you have, say, your checking account and an auto loan at the same credit union they are automatically connected. If you were to stop making payments on the auto loan, the credit union might simply take the money out of your checking account.
It could be even worse
Let’s suppose you have your mortgage, credit card and checking account at the same credit union. If you were to fall behind in payments on the credit card, the credit union could take the money out of your checking account, which could cause your mortgage check to bounce.
A traditional bank
In comparison, a traditional bank must get a court order before taking money from either your checking or savings account to pay on a delinquent loan – even if both the checking account and loan are at the same bank.
Keep them separate
What this suggests is that it might be prudent to keep your checking and savings accounts at a bank and your credit card, auto loan or mortgage at a credit union. This way, your checking account won’t be cross collateralized with your debts (credit card and mortgage) saving you from the danger of having money taken out of your checking account to pay on the auto loan or mortgage.
Credit union’s’ strengths and weaknesses
As noted above, a credit union can be a great place to get a credit card, loan or even a checking account. They almost always offer better interest rates and terms on their loans then do banks. Their customer service is usually better. Many credit unions will allow you to open a checking account with just a one-dollar deposit, which would then allow you to take advantage of its other services. Plus, credit unions are now offering more and more services these days including savings and checking accounts, mortgages, new and used car loans, debit and credit cards and even more.
The downsides of credit unions are that your accounts could be cross-collateralized as described above. Also, as a general rule credit unions have fewer branches and ATMs than banks. However, some credit unions have offset this weakness by joining networks of surcharge-free ATMs.
Some credit unions are not insured. While the National Credit Union Administration insures accounts up to $100,000 for many credit unions, there are still some that remain uninsured. Some credit unions do not offer as many services as banks so it’s important to learn what they offer before opening an account or applying for a loan.
The biggest negative
The biggest con to credit unions is that in some cases you must be the member of a specific group of people in order to join. For example, the employees of the Public Service Company (a supplier of electric power) founded the Public Service Credit Union. For many years you had to be an employee of the company to join the credit union. However, many credit unions (including this one) have now opened their membership to just about everyone. However, before you leap in, it would pay to make sure you could actually join the one you’ve chosen.
