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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!
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.
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 debit 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.
- Sign up for alerts through your digital banking account. Push, email, and text messages available.
- 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 debit card 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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