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Credit Unions vs. Banks by Dallas Bergl

Why use a credit union instead of a bank? This is a common question that we are asked. To best answer this question, it is helpful to explain what both of these organizations are and are not. Credit unions and banks are both financial institutions but this is where the similarities end. Let’s first briefly explore what banks are and then move on to credit unions.

Banks are for profit, generally shareholder owned companies delivering a wide array of financial services to the public at large. Banks are regulated by either the federal government or state regulators, depending on their charter. They are federally insured through the Federal Deposit Insurance Corporation (FDIC). As a for profit organization, their overriding concern is to use their resources as efficiently as possible to maximize earnings. This means that consumers are a means to that end. It does not mean that they do not care about their customers, but it does mean that the first question they must ask is how much income can we extract from our customers without driving those that are profitable to another financial institution. Banks have become so efficient at this process that the banking industry has repeatedly set record profits year over year for the better part of the past decade.

Credit Unions are not-for-profit organizations offering a wide array of financial services and they are owned by their membership. If you have an account with a credit union, you are a member and an owner. Membership is limited and you must be eligible in order to join. These requirements vary from credit union to credit union. As a member/owner, you have the right to both vote and run for the Board of Directors. You get only one vote regardless of how much money you have at the credit union and all of our directors are volunteers and receive no compensation for their service. This process guarantees that your credit union is looking out for your financial interests and not that of a small group of stockholders. Credit Unions are also regulated by the government, either Federal or State depending on their charter. Credit Unions are also federally insured (with the exception of a very small number of privately insured institutions). The federal insurance program for credit unions is the National Credit Union Share Insurance Fund (NCUSIF). This fund is arguably stronger than the banks insurance fund.

Credit Unions can and do make excess earnings (profit), however this money belongs to you the members, not stockholders or management. This money is used to fund required reserves to ensure a safe and sound financial institution. These reserves provide credit unions the ability to safely survive economic downturns, loan losses and periods of slower income growth. It is the goal of credit unions not to accumulate more reserves than their Board feels is necessary for their long term viability. In fact, most earnings are returned to the members in the form of lower loan rates, higher share deposit rates, fewer fees and better service. Some Credit Unions like INOVA FCU, also return excess earnings to the members in the form of bonus checks during those periods when earnings have out- paced reserve requirements.

In short, if you are looking for a financial institution where you are more than a dollar sign, a credit union is a great choice. Because you are the owner, your voice is always heard, it is your interests that comes first, not big profits. This may be the reason that Credit Unions have always outperformed Banks in their industry’s own survey of customer satisfaction among financial institutions. Studies have also indicated that the existence of credit unions has contributed to keeping the cost of financial services provided at banks lower due to the competitive pressure exerted by the credit union industry. Recently, a banking executive stated that their record profits would have been even higher if it had not been for the existence of credit unions. The best answer to “Why use a credit union instead of a bank?” is that your financial well being is always first with a credit union.

NAFCU News Consumer Reports surveys members and finds 93% are highly satisfied with their membership with their credit union!

Protect Your Credit by John Katalinich

Your credit rating is one of the most important assets you possess. And in these times of increased identity theft, you must go to great lengths to protect it. Having good credit can be the difference between having financial freedom and not. It can be the difference between opportunity offered and opportunity denied. In all other systems in this country, you are innocent until proven guilty. Not so with your credit. A creditor needs only to report that your payment is delinquent and it goes on your credit report. Unfortunately, it is your responsibility to prove conclusively that your payment was, in fact, not late. If you have no proof, you cannot change what your creditor reported.

This fact is especially frightening if someone steals your identity, because even if you are innocent, it will cost you time and money to straighten everything out. Your creditors cannot be held liable as there is no way they could have known you were a victim of fraud. If, in the unlikely event you can find and identify your identity thief, chances are slim you will be able to recover costs from him/her for your efforts to clear your name. In other words, because of the high cost of correcting any problems after identify theft has occurred, it is worth the effort to take precautions to help avoid it in the future.

An important weapon in this war against identity theft is a personal shredder. Shredders cost about $25, but can save you thousands of dollars in legal fees and other expenses. Buy one. Use it religiously. It is the cheapest and easiest way to protect your privacy. Shred any paperwork containing personal information before you throw something away. Dumpster-diving, the practice of looking through trash for personal information, is a common method that identity thieves use to get personal information. Therefore, shred: 

  • All of those credit card applications you get in the mail
  • Any credit card receipts
  • Pay stubs
  • Bank statements, deposit receipts
  • Utility bill stubs
  • Old tax returns
  • Anything containing your SSN number 

Additionally, you should obtain a copy of your credit report several times per year and monitor it regularly. INOVA’s SHIELD Checking offers IDProtect®, an identity theft monitoring and resolution service1. If major changes occur within your credit report you will be notified.  It includes up to $10,000 identity theft expense reimbursement coverage2, which will cover expenses associated with restoring your identity should you become a victim of identity theft. You will also have access to a free copy of your credit report every 90 days. Because you are a member, you can get the benefits of an expensive ID theft protection service all for a low monthly account charge of just $5.

Just when you thought it was safe to go back into your Inbox, there's a new form of identity theft called phishing. What is phishing? Phishing is a type of deception designed to steal your identity. In phishing scams, thieves try to get you to disclose valuable personal data by holding themselves out as an employee of your financial institution, a government agency, a credit reporting agency, etc. Phishing schemes can be carried out in person or over the phone, and are delivered online through spam e-mail or pop-up windows. Phishing schemes can use a website that looks nearly identical to that of your financial institutions to collect data. If someone should ever call you unsolicited claiming to be from your financial institution and ask for your credit card number, social security number, pin number, or any other password you should be leery. Your financial institution should already have all of this information and will not request it from you.

Secure your important paperwork. Buy a file cabinet and lock it or rent a safety deposit box. Paperwork to be kept secure includes:

  • Trust documents
  • Wills
  • Birth certificates
  • Marriage certificates
  • Deeds
  • Social Security cards

Identity thieves are getting more creative and more motivated. Because consumers bear almost all of the risk, it is important to take steps to protect your credit before it gets damaged. Shred what you don’t need and keep all other sensitive financial information secure. Review your credit report regularly and use common sense.

Deposit Returns

In today's volatile markets, a wise investor looks for ways to balance out earnings without tying up all their investment funds for long periods of time. Many investors are uneasy with the stock market's unpredictable performance. As a rule, shareholders want to keep a portion of their portfolio liquid.

To maximize the return on your money, you might like to try an option called laddering. To understand this strategy you will need a basic understanding of share certificates.

What is a share certificate? A share certificate is a credit union account that earns dividends on the principal placed with the credit union. The share certificate is purchased for a fixed term. These terms may range from 30 days to 6 years in which you, the shareholder, agree to give the credit union your money for the agreed period of time. Dividends are compounded and credited monthly. Keep in mind; there are penalties for early withdrawal and fees may reduce earnings. In addition, share certificates are federally insured to at least $250,000 by the National Credit Union Administration and backed by the full faith and credit of the United States Government.

How does a laddering strategy work? A share certificate ladder is made up by purchasing several share certificates at one time, or over a period of time, with different maturity dates. One example of laddering your share certificates is to have share certificates with maturity dates of one year, two years, three years, four years, and five-years. These five investments make up the rungs of your ladder, with one certificate maturing every year for the next five years.

The following is an example of "laddering" share certificates:

Let’s assume you have $50,000 to invest. You choose to open the five share certificates for $10,000 each as follows:

  • Share Certificate 1 $10,000: 1-Year Term
  • Share Certificate 2 $10,000: 2-Year Term
  • Share Certificate 3 $10,000: 3-Year Term
  • Share Certificate 4 $10,000: 4-Year Term
  • Share Certificate 5 $10,000: 5-Year Term

At the point of share certificate number one's maturity date, it would be renewed for five more years. Share certificates two and three would also be renewed for five more years at the end of their term. Share certificate number five is already a five-year certificate. By laddering your share certificates in this manner you will have the best possible rates of return with a share certificate maturing every year. This strategy allows you to take advantage of higher rates normally associated with longer-term share certificates while maintaining more frequent access to a portion of your funds. If you do not need the certificate funds, re-invest the money into a new share certificate for the longest term possible. Taking action to re-invest your savings will in turn keep your ladder growing.

 Another advantage of laddering your share certificates is that over time the rate of return typically evens out the high peaks and low valleys that interest rate cycles historically take. Currently financial institutions are paying some of the highest certificate share rates we have seen in the last decade.

Budgeting Basics

What is budgeting? To many, it’s a topic that evokes a tremendous amount of anxiety. “Creating a budget is much too difficult”. “It takes many hours and an understanding of accounting that most people don’t have”. Really though, a budget is nothing more than a plan of how to manage money over a given period of time. It does take work, but getting started is much easier than most people realize. 

The starting point for any budget is to ask some questions. 

  • How much money do I bring in during a week, month, or a year?
  • How do I spend my money during that same period of time?
  • What are my goals?

To capture the money inflows and outflows, experts recommend spending an entire month writing down how every dollar is spent and every dollar that is earned. Also, it is important to use the amount you are actually paid in your paycheck (net earnings) rather than the dollar per hour or salary you earn (gross earnings). Finally, what are some things you would like to buy? Do you want to take a vacation? Do you want a new car? Are you saving for a child’s college education? And how much will each of those items cost? All of this information serves as the foundation for creating your budget.

When you do your goal setting, identify “needs” versus “wants”. For example, you need a car to get to work, but you don’t need a Mercedes. The Mercedes is a want. You need jeans to go to school, but you don’t need $100 designer jeans. The designer jeans are a want.

The income you earn can come from numerous sources. If you have a job, you earn a paycheck. If you receive money on your birthday or sell items in a garage sale, that is also income. When you receive a paycheck, you also receive a pay stub. It is important to understand what is included on the pay stub. If you earn $10 per hour and work 40 hours in a week, your gross income is $400. However, there are deductions that reduce your earnings in order to arrive at your net earnings. Those deductions include federal and state income tax, Social Security tax, Medicare tax and any other deductions you may have for medical insurance, 401K, etc.

Expenses can be broken down into variable and fixed expenses. Fixed expenses are items that must be paid every month and the amounts don’t change. Examples of fixed expenses would include your car payment, auto insurance, and rent. Variable expenses can change which means there is some level of control. Examples of variable expenses would include food, gasoline, utilities, clothing and entertainment. Another fixed expense that you can create is summed up in the phrase “pay yourself first”. It is an easy way to begin saving and ultimately putting yourself on the track to getting the items you highlight as your goals. The concept is that each time you receive your paycheck, take some money and move it into a savings account. The trick is not giving yourself a choice and making it a regular part of your budget. Most self-made wealthy people use some form of this concept.

If your income exceeds your expenses, then the additional monies can be saved or consumed. However, it is important to consider saving at least a portion of this overage to account for any unplanned items (i.e. car repairs, home repairs, medical expenses). 

If your expenses exceed your income, then an adjustment needs to be made to your budget because no one can survive spending more money than they earn forever. As a result, either less money can be spent or more money needs to be earned.

Once your budget has been created and you’ve reached a point where your expenses do not exceed your income, you must go back and determine if the goals you set at the beginning can be attained with your budget. If not, then additional adjustments to either your budget or your goals must be made. Maybe you need to get a second job. Maybe you don’t need to eat out or buy that Starbucks coffee every day. Maybe you can buy a used car rather than a new one. The important thing is evaluation and an understanding that your budget is a living document and your goals can change regularly.

For free budgeting tools and other credit counseling services, visit Consumer Credit Counseling Services’ website at www.moneymanagement.org.

Business Services by Thomas Smith

Borrowing money for a business start-up, refinance or expansion is very important to any business. With proper planning this process can be easier than you may expect. Know your business, be prepared and willing to discuss all facets of your business and provide valuable information to the lender. The Credit Union generates income by lending money to members, but also has to protect the memberships’ deposits by assessing loan risk and making well thought-out loan decisions. It should be your objective to present the information in a professional manner and convince the lender that you are a reasonable credit risk.

Sources of Financing

The most common way to borrow money for your business is through your Credit Union. Before applying for a business loan investigate other sources for financing. This can include your own personal savings or borrowing against personal assets. Many new businesses have been started with home equity loans. Borrowing money from relatives and friends may also be an option at lower interest rates, benefiting your business.

 Loan Proposal

When meeting with the lender it is very important that you are prepared to discuss your loan request and details about your business. A written loan proposal is suggested to present to the lender. This proposal should include the following:

Introduction: A description of the business, location, age and history of the business, principals involved and their ownership percentage, legal status of the entity, # of employees and tax identification number. State the amount of your loan request and the reason for the request.

Management: A resume showing experience, education and skills of the principals.

Products and Services: List the products and services that you offer and how you differentiate them in your industry and market. Include any information about products and services that you may be developing. How do you plan to market those products and services?

Financial Statements: For an existing business provide 3-years tax returns and/or accountant prepared income statements and balance sheets along with an interim financial statement for the current year. A new business should provide at least a 2-year projected income statement and balance sheet. Provide a personal financial statement and tax returns on each principal of the business.

Collateral: Provide a list of assets that the business has to pledge as collateral. This can include a depreciation schedule, inventory listing and accounts receivable aging. Collateral is typically discounted by lenders in order to conservatively consider the market value or liquidation value. Depending on the type of loan request and the information provided, the lender may require additional information.

Resources 

Every business needs to work closely with an Attorney and a Certified Public Accountant (CPA). An Attorney can assist in setting up your new business entity, provide consultation on any legal issues while you are in business and help with any tax planning or ownership succession. A CPA will assist in providing accurate financial information, projections, tax reporting or planning for your business. There are also local Business Development Centers that can assist in writing business plans and loan proposals.

How does the Credit Union make its decisions?

The Credit Union has its own policies and federal regulations that it must abide by in making a credit decision. The five C’s of Credit are the primary factors in making a loan decision.

Cash Flow: The primary factor in a loan decision is the borrower’s ability to repay the debt. The Credit Union will review the projections or historical financial information to determine your company’s ability to repay the debt. Your Cash Flow must exceed your debt service.

Collateral: The assets that your business owns or purchases will be pledged to the Credit Union to secure the loan(s) requested. The Credit Union will discount the value of those assets according to their policies. If there is not adequate collateral coverage, the Credit Union may require additional collateral such as personal assets. 

Character: Does your business pay its bills in a timely manner? A personal credit bureau will also be ordered on the principals of the business to determine their debt repayment history. At time of application let the Credit Union know of any credit history problems and explain those problems. 

Capitalization: Your company’s balance sheet will be reviewed for sufficient capital. This includes retained earnings and your company’s net worth. Your company’s total assets should exceed total liabilities.

Conditions: What external factors affect your business? Industry conditions, economic trends and competition may affect the success of your business. Explain these factors with the lender. Be prepared to discuss the management structure of your business. This is valuable information in determining succession management and the future of your business. 

There is a great deal involved in applying for a business loan. Talk with the lender throughout the process to make sure they have the information they need. Use the lender or an accountant as a counselor in determining proper loan structure and realistic assumptions in the projection process. Be confident in presenting the loan proposal. Remember, you want to convince the Credit Union that you and your business are a reasonable credit risk. 

Getting a Mortgage by John Katalinich

Home Ownership is part of the American Dream. It is typically the single largest investment that each of us makes in our lifetime. Unfortunately for some, the process of getting a mortgage is intimidating. And those horror stories are the ones that are shared and remembered by consumers and thus contribute to the misconception that getting a mortgage and buying a home is more difficult than it actually has to be. The process can be much simpler if you are prepared to do some planning.

The first step is to ask yourself some simple questions. Do I want to own a house? Am I tired of paying rent? Is the house I currently own too small? How long do I plan on living in a community? How large of a payment can I afford? While the answers may not be simple, they are key factors in determining if it is time to purchase a home.

A great number of people never ask themselves these questions. Instead, they just start looking for a house, they fall in love with one and finally go to a mortgage broker or lender to get a loan. Following this path undoubtedly creates the anxiety the mortgage process can evoke. 

Once you adequately answer these questions and make the decision to purchase a home, the best next step is to talk to your lender. This step serves to address a number of the stumbling blocks that can occur. To begin, a lender can help you determine if what you believe you can afford is what you can actually afford. In recent years with the skyrocketing home prices, people buy homes that are much too expensive because they believe that their incomes and home values will continue to rise at the same pace as in the past. The risk you run is that something changes in either the housing market or your employment status resulting in you no longer being able to afford your new home. Therefore, it is best to make sure that you can continue to pay for housing should you have a short term shock to your financial situation.

Next, getting a pre-approval for a home you can afford will help speed the process of getting into a home you want to purchase with a loan product and term that best suits your needs. Currently, there are numerous loan types available. These include: Fixed Rate Mortgages, ARMs (Adjustable Rate Mortgages), Balloon Mortgages, Bi-Weekly Payment Mortgages, Interest Only Mortgages, 100% Financing Mortgages, FHA, and VA loans.

In order to be pre-approved, you will need to provide your income, how much you owe to other lenders, a detailed list of assets and other personal financial information. Most of these items can be provided from your pay stubs, W2’s, bank/credit union statements and, if possible, personal financial statements. Once your lender collects this information and a mortgage application is completed, your mortgage lender will examine your credit from a credit report obtained from one of the national credit reporting agencies. These reports detail all current outstanding amounts owed and monthly payments on those balances, how well you have paid previous debts, and whether you have filed bankruptcy in the past. The reports also provide your lender with a credit score, which is a number that represents how risky it is to lend you money. The higher the score, the lower the risk you are to the lender. 

It is very important that you get a written pre-approval letter from your lender that is binding and guarantees you financing. A written mortgage commitment should be given to you stating specific terms of the program under which you are approved. The written commitment should include: the loan amount, term, and interest rate agreed upon. These terms will be contingent upon an acceptable appraisal of the property, title work, and the purchase agreement. You should also receive a Good Faith Estimate which will protect you from undisclosed, and sometimes outrageous, fees involved in the transaction.

Another factor you should consider when choosing a mortgage lender is to find one who can provide the direct servicing of your loan. Local servicing provides you with a local contact should you have problems or questions about your loan (i.e. monthly payment, taxes, insurance). 

The bottom line is that the mortgage lending process should be the least of your worries when purchasing the home of your dreams. Choose a mortgage lender who has your best interest and financial well being at heart.

What is a Credit Score by Lisa Adams

Credit scoring systems are utilized by creditors to determine if borrowers are a good risk for credit requests. Data is analyzed from the credit application and the credit report evaluating items such as: bill-paying history, the number and type of accounts opened, late payments, collection actions, outstanding debt and the age of the accounts. It reviews all applicants objectively by comparing the borrowers’ credit information to the credit performance of consumers with similar profiles. The credit score is a three-digit number used by financial institutions to assist in loan decisions. This score predicts the likelihood that a borrower will repay the loan and whether they will make the payment on time. Before the prevalent use of credit scoring, a financial institution could make only a personal interpretation of how likely a borrower was to repay a loan as agreed. Personal judgment would influence whether or not a person would be approved for a loan. The accessibility of credit scoring has drastically changed these methods.

Credit scores range between 300 and 900. There are three major credit bureaus that report these scores: Equifax, Experian and TransUnion. Each credit bureau has its own unique system. However, the scoring models have been standardized so that a numerical score at one bureau is the equivalent of the same numerical score at another. Thus, a score of 700 from Equifax indicates the same creditworthiness as a score of 700 from TransUnion or Experian, even though the calculations used to determine those scores differ. Credit bureaus calculate a credit score each time a credit bureau is requested by a lender, and is based on the current information in the credit file. For example the higher the credit score, the lower the perceived credit risk is in lending to this borrower. A credit score does not evaluate a person’s behavior or any personality traits; it simply gives a lender a snap shot of the risk involved in granting credit.

Credit scores affect all areas of a borrower’s financial life, and it is important to understand the basis of these scores. The law prohibits credit scores from taking into consideration ethnicity, religion, gender, marital status or nationality. Credit scores are driven by both positive and negative information in a credit report. Approximately 35% of the credit score is based on payment history. In order to make an unbiased decision, a lender must know how the borrower has paid past credit obligations. About 30% of the score is based on the amount of debt owed. Owing a great deal of money on numerous accounts can indicate that a person is overextended. Typically, a longer credit history will increase the score. This is important to note because 15% of the score is based on length of credit. Opening several credit accounts in a short period of time can impact a score, which accounts for approximately 10% of the credit score. The final 10% is based on a combination of credit cards and installment loans. While a healthy mix will improve your score, it is not necessary to have one of each, and it is not a good idea to open credit accounts you do not intend to use. The credit mix generally will not be a key factor in determining your score; nevertheless, it is more important if your credit report does not have a vast amount of information from which to base a score.

In general, a credit score of 700 and greater is considered “good credit”. Borrowers with these scores receive the lowest interest rates. The lower the credit score, the higher the interest rate a borrower may pay. For example, two separate borrowers wish to purchase a $15,000 auto loan for a 60-month term. One has a credit score of 700 and the other a credit score of 620. These are different scores, which result in a different credit risk for the lender. The borrower with the 700 credit score receives a much lower interest rate, which results in a low payment of $290.00 per month. The borrower with the 620 credit score receives a higher interest rate, which results in a higher payment of $334.00. Over the life of this loan the 620 borrower will pay over $2,500 more in interest than the borrower with the score of 700.

Your credit history can affect your daily life. Being knowledgeable of how your pay habits reflect your credit score allows you to better control your finances. The better your credit history and credit score, the better your chances of obtaining a low-cost loan, an insurance policy, renting an apartment, or even qualifying for a job. Paying on time is the most important thing you can do to keep a higher credit score. 

Remember, a credit score is only as accurate as the information contained in your credit report, so be sure to request a copy of your credit report each year from the three major credit reporting agencies. I hope this information will help you establish, re-establish, or continue on your path of good credit history.

Avoiding Fraud

Credit and charge card fraud costs cardholders and issuers hundreds of millions of dollars each year. While theft is the most obvious form of fraud, it can occur in other ways. For example, someone may use your card number without your knowledge.

It's not always possible to prevent credit or charge card fraud from happening. But there are a few steps you can take to make it more difficult for a crook to capture your card or card numbers and minimize the possibility.

Guarding Against Fraud

Here are some tips to help protect yourself from credit and charge card fraud.

Do:

  • Sign your cards as soon as they arrive.
  • Carry your cards separately from your wallet, in a zippered compartment, a business card holder or other small pouch.
  • Keep a record of your account numbers, their expiration dates, and the phone number and address of each company in a secure place.
  • Keep an eye on your card during the transaction and get it back as quickly as possible.
  • Void incorrect receipts.
  • Destroy carbons.
  • Save receipts to compare with billing statements.
  • Open bills promptly and reconcile accounts monthly, just as you would your checking account.
  • Report any questionable charges promptly and in writing to the card issuer.
  • Notify card companies in advance of a change in address.

Don't:

  • Lend your card(s) to anyone.
  • Leave cards or receipts lying around.
  • Sign a blank receipt. When you sign a receipt, draw a line through any blank spaces above the total.
  • Write your account number on a postcard or the outside of an envelope.
  • Give out your account number over the phone unless you're making the call to a company you know is reputable. If you have questions about a company, check it out with your local consumer protection office or Better Business Bureau.

Reporting Losses and Fraud

If you lose your credit or charge cards or if you realize they've been lost or stolen, immediately call the issuer(s). Many companies have toll-free numbers and 24-hour service to deal with such emergencies. By law, once you report the loss or theft, you have no further responsibility for unauthorized charges. In any event, your maximum liability under federal law is $50 per card.

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