Banks vs. Federal Credit Unions

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Banks vs Federal Credit Unions: Which is better for you?

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One of the most common issues with college students (and general society for that matter) boils down to money. Everyone needs it yet the average college student never seems to have much of it. In a previous article, I discussed loans and why students should understand the basic differences between Private and Federal loans. If you haven’t read that, feel free to backtrack using this [link] and come back when you’re done.

This time around, I’m going to discuss a potential alternative to banks that many college students may not be too aware of.

Now I’m sure many students in college are familiar with banks even at the most basic level. You’re aware that they essentially hold your money for you and allow you to access it while preventing others from getting to it (with the use of a Checking Account). Some of you may even be aware that banks supposedly allow your money to grow if you hold your spare cash in a Savings account (this only applies to you college students that actually have spare cash). Finally, you’re probably aware (especially if you read the aforementioned article) that banks can allow you to take out loans to pay for expensive products, i.e.: college.


 

But what if I told you that banks might not be your best option? What if there was a place where you could store your money just as safely, multiply your cash, and obtain loans with more ease?

No, this is not a bank of Narnia hidden away in the deepest remnants of your imagination. These facilities are known as Federal Credit Unions.

Before I get into FCUs and how they can specifically benefit you as a college student, allow me a moment to differentiate between the two and give you a better, basic understanding of what makes these two facilities so different.

Banks vs FCUs

On a very basic level, banks make their money by using the money you deposit and loaning it out to others with interest. So, let’s say you have $100 in your checking account. A bank can loan that $100 to another person and collect money on their fees. When all is said and done, let’s just say that the bank made an additional $500 on your $100.

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As a college student, it’s very important to consider how you manage your money. Your efforts now will affect you tremendously for years to come

Now, I simplified very heavily. In real life, a bank would have multiple customers and will charge interest for things such as credit cards, home loans, school loans etc. As you can imagine, this really starts to add up. This is where a bank’s revenue comes from.

And I didn’t even get to the Overdraft fees, ATM fees, etc, etc, etc.

But what if I keep my money in a savings account where it can grow?

Well, in theory, that would work but the only issue is the concept of inflation. With inflation, prices go up by about 3% each year. So, if an item cost $1.00 this year, it would cost $1.03 next year. On the other hand, your bank’s interest rates for your savings is only .01% (it can vary but I used PNC’s interest rates for reference). Essentially, you’ve lost money each year that you put money in a saving’s account since your dollar has lost value when compared to the cost of items.

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This is a chart to show PNCs Interest Rates for a Savings Account from 2017

Well, there are still loans, right?

Sure, you can still use banks to take out loans on important purchases such as cars or tuition (just to name two very common loans). The only problem is that banks tend to charge very high-interest rates, meaning that you will likely be paying back these loans for quite a while.

The Difference Between Banks and FCUs

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Check out this infographic to see a breakdown of Banks vs. FCUs

So, let’s get into what actually separates FCUs from banks. Your local bank will likely be more invested with profits. Meanwhile, your local FCU will more likely be interested in you. You see, FCUs focus on their members and as a result, you’re more likely to receive better customer service. Why is this? Well, this is because in an FCU, you are a partial owner. The money you put in is used to benefit yourself and the other members of the FCU. In comparison, banks have the goals of increasing profits so they tend to focus on maintaining and pulling in the most money possible.

Remember the Savings Account issue I mentioned earlier? Do you remember how I mentioned the virtually non-existent interest rates? FCUs help you in this department as well offering interest rates at about 6x the amount that banks do, allowing you to get more out of that tucked away dollar.

Still not sure about considering FCUs? Well, imagine the following scenario. It’s Friday night and you’ve had a long week of classes. Successfully, you’ve managed to crush 2 tests that you were stressing out over for the past 3 weeks. Not only that, you’re above schedule and you’re done with your big group project that’s due next Tuesday. You decide to go out and unwind. It’s been a long week and you deserve it.

Just as you’re about to head to the bars you remember that there’s a 3 dollar cover at every bar. No big deal, all it takes is a quick trip to the ATM to grab some of your money. What’s this? A fee for $4.50?! But it’s your money? And on top of that, the fee is higher than the amount you need! Yeah, you’re being charged to access your own money. This is yet another method banks use to make a profit.

Many FCUs don’t charge you to use ATMs affiliated with their branches or networks. And those that do charge still attempt to charge you a smaller fee when compared to most commercial banks.

The benefits don’t end there. On top of everything else that I’ve mentioned, FCUs tend to have much lower APRs (Annual Percentage Rate—money charged for using your credit card) and can work with you to provide a better interest rate on your loans and other financial problems you have.


Now, don’t get me wrong, there are still some downsides to FCUs (nothing is perfect). FCUs tend to have less physical locations when compared to popular banks. This means that if you prefer to have face-to-face interactions, you may be in for a little bit of a drive. Also, because they are not for profit, FCUs also typically have a lower technology budget.

This could mean that their online support might not be as efficient or as nicely structured as other banks. Nevertheless, these are small downsides (in my opinion) and I wouldn’t consider these absolute deal breakers after considering all of the pros.

If you’d like to find a Federal Credit Union near you, I encourage you to use the following link to learn more:

To summarize everything up, banks focus on profits and do what they can to get you to spend the most amount of money. FCUs, on the other hand, have your interest in mind as they are owned by their users. FCUs tend to have more conservative interest rates on loans, lower ATM fees, better customer service, lower APRs on cards, and higher returns on your deposits. Some downsides include less credit card options and less physical locations.


Resources

https://www.fool.com/investing/general/2015/06/07/credit-union-vs-bank-4-major-differences.aspx
https://www.thebalance.com/loans-4073271
https://www.nerdwallet.com/blog/banking/credit-unions-vs-banks/
http://www.moneycrashers.com/why-credit-unions-are-better-than-banks/
http://www.investopedia.com/terms/c/credit-reporting-agency.asp