Credit unions make a hard charge at banks

Competitive rates, eased restrictions, and customer service win a new wave of customers

For Cherie McCombs, a mortgage processor in Roanoke, Va., being turned down last fall for a car loan by her bank was the last straw. Although she had a six-year history of unblemished credit, Ms. McCombs had already seen her requests for a credit card – and even for overdraft protection – denied.

Fed up, she eventually obtained the loan through a finance company.

But frustrated by the way she had been treated, McCombs decided to move her banking elsewhere, and began researching other banks.

McCombs had been a credit union member in the late '80s and early '90s in another state, and recalled having had only positive experiences in dealing with it. When she found out a few months ago that she was eligible to join a credit union through her daughter's workplace, she jumped at the chance. Within days, she was rewarded.

"The credit union called me to ask if it could have the car loan," she says. "It even lowered the rate. That's what banking should be about." McCombs promptly transferred the loan.

In the hotly competitive banking industry, credit unions are proving themselves to be significant challengers in the battle to lure customers.

Nonprofit, tax-exempt financial institutions, they provide services to member-owners who share a common bond, such as workplace or location.

Credit-union membership has grown from 63.8 million members in 1992 to 82.6 million members in 2002, said a report last month from the Credit Union National Association (CUNA).

Household savings held in credit unions grew from 7.3 percent of the national market in 1992 to 9.2 percent in 2002. Comparable accounts held in banks fell from 77.5 percent in 1992 to 68.9 percent this year.

Credit-union-issued consumer loans grew from 16.1 percent share of the national market in 1992 to 17.1 percent in 2002. Loans issued by banks (including savings and loans) fell from 49.6 percent in 1992 to 39.3 percent in 2002.

Some in the banking community say credit unions' tax-exempt status unfairly enables them to consistently offer lower rates on loans and higher rates of interest on deposits than do banks.

"Once, members of a credit union knew each other and pooled their resources to provide credit for their co-workers or neighbors," says the American Banking Association on its website. Today, it points out, geographically based credit unions can serve entire states. "Despite this departure from their original mission, these credit unions continue to be afforded special treatment," says the ABA, "including exemption from federal taxation and from the regulatory responsibilities that apply to commercial banks."

There are many other reasons for the rise of credit-unions. Congress passed a Credit Union Membership Act in 1998, which eased expansion. Credit unions also marketed themselves heavily, and many expanded or added eligibility categories. Those changes boosted the industry's profile.

"I've seen more people coming in with a greater understanding of what we do," says Paul Economy, vice president and branch manager of Member One Federal Credit Union, in Roanoke, Va. The credit union has 49,000 members and assets of about $180 million.

"Fifteen years ago, we were only looked at as a place for savings and loans. People were not looking at us for a full menu of financial services," he says.

"In the past five years, I've had more long-time members inquiring about different services, such as first mortgages, home-equity loans, investment opportunities," Mr. Economy adds.

Experts warn against defaulting to one type of institution over another. Ruth Lytton, professor of personal financial management at Virginia Tech, advises consumers to compare fees and services before deciding where to open an account.

"Because of the increase in competition in the marketplace, we cannot draw any hard and fast conclusion that any one institution is cheaper than another," says Ms. Lytton.

"We do know that, across the board, the cost of account services has continued to rise," she says. "It's important to find the best combination of products and services to meet your needs at the cheapest cost."

Lytton advises consumers to consider an institution's range of services and their costs, convenience, everyday treatment of customers, and ease of access to its services – through ATMs and online banking, for example.

Lower rates drew Sara Thompson and her husband to join a credit union in southwest Virginia.

"We joined primarily because we refinanced our car loan," Ms. Thompson says. "Our financial adviser did some rate shopping and recommended this credit union [Member One] and another bank that offered the lowest rates."

But it was customer service that sealed the deal.

"We liked the extra perks, like movie-ticket discounts," says Ms. Thompson. "We liked the atmosphere. You feel more like a member than a client here."

Finding one that fits

Credit unions are chartered by the federal or state governments. The National Credit Union Share Insurance Fund (NCUSIF) provides deposit insurance for up to $100,000 for federally chartered credit unions and some, but not all, state-chartered institutions.

Credit unions can have more than one of the following charters:

Occupational Members either work for the same company, or are employees of different member companies who have asked to join the credit union (and do not have enough members on their own to start their own credit union); relatives of employees are often eligible through this category.

Associational Members belong to the same organization, principally faith-based.

Communal Members live, work, worship, or go to school within a common geographical area. Additionally, credit unions have a mandate to service "underserved" populations which are well-defined disadvantaged neighborhood, community, or rural districts that meet certain criteria with respect to income and population.

To find a credit union to join, check your Yellow Pages, call the Credit Union National Association at 800-358-5710, or contact your state's credit union league. The CUNA website,, offers a list of state contacts.

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