Credit Cards and the Credit Union Option

By Beth Longware Duff   

Americans have become increasingly angered by the way banks have prepared for the roll-out of the Credit CARD Act of 2009 by jacking up credit card interest rates, minimum payments and fees while slashing credit lines. Many consumers are seeking a more user-friendly alternative to a bank-issued credit card, and they're finding it at their local credit union.

A credit union is a cooperative financial institution that's owned and controlled by its members, and it provides credit and other financial services to those members at reasonable rates.

In the United States, credit unions are not-for-profit and tax-exempt. They're chartered either by the federal government or by a state, and their deposits are insured for up to $250,000 per member by the National Credit Union Association.

Although they vary considerably in size, credit unions are typically smaller than banks. In 2007, the average U.S. credit union had $93 million in assets, while the average U.S. bank had $1.53 billion, according to the Credit Union National Association.

Smaller is sometimes better, as many consumers are finding out. Take, for example, a recent review by the Pew Charitable Trusts that compared terms for credit cards issued by banks and credit unions. It found that the credit unions offered the most consumer-friendly deals. 

"Credit unions offered significantly lower advertised rates compared to bank credit cards, with penalty fees that were half the cost of comparable bank fees and fewer dangers associated with 'unfair or deceptive' practices," the report noted. "The observed credit unions presented a distinct alternative to credit card pricing and other practices of the observed banks."

Pew's comparison of interest rates and fees for 12 bank credit cards and 12 credit union credit cards illustrated a major gap between them. For starters, the median advertised interest rates on the credit union cards were between 9.90 and 13.75 percent annually, depending on the consumer's credit profile. These rates were approximately 20 percent lower than comparable bank rates, the report noted.

The median late fee and overdraft fee for the bank cards were both $39, compared to $20 for credit union cards. The median bank penalty interest rate for cardholders who pay late or miss a payment was 28.99 percent, and in the vast majority of cases (90 percent), those rates can continue indefinitely even if the cardholder resumes on-time payments. By comparison, the median credit union penalty interest rate was 17.90 percent, and one-third of those penalties would end after three to 12 months of on-time payments.

"Because credit union penalty charges were both less frequent and less severe than those of banks, their cards may be useful benchmarks as the Federal Reserve creates new 'reasonable and proportional' penalty rules, as required under the Credit CARD Act," the report concluded.

In addition to those advantages, credit unions are often known for providing a higher level of customer service than banks typically do, in good part because a credit union's members are also its owners. Credit unions have a reputation for working hard to get their members the loans they need, even if they've already been turned down by other banking institutions.

Of course, credit unions do have their disadvantages. They tend to be smaller and more localized, which can make doing business on a larger scale more difficult. Branch offices and ATM machines may be few and far between, although there are locator services online, including CO-OP Network, Credit Union 24, and Find A Credit Union.

For consumers interested in checking out the credit union credit card alternative, a new website launched on December 1, 2009, sponsored by Card Analysis Solution, a national credit union card consultancy.

"There is intense interest from consumers in finding credit cards and providers that don’t charge ridiculous charges and rates," reports Card Analysis Solution founder Ondine Irving.

For some helpful general guidelines for choosing a credit card, check out the Federal Trade Commission's website.