If Credit Unions Are Better, Why Don’t More People Use Them?

You’ve probably read it somewhere — credit unions are better than banks. That’s what Consumer Reports, Bankrate.com, and Money magazine say.

Credit unions are owned by members. They are not for profit. They pay higher interest rates on checking accounts, savings accounts and CDs. They charge lower interest rates on credit cards, car loans and home loans. They also charge lower fees for overdrafts and late payments. They have more friendly customer service. Credit Unions have NCUA insurance just like FDIC insurance for bank deposits.

What’s not to like them? It begs for a question:

If credit unions are better than banks, why don’t more people use them?

According to Monthly Credit Union Estimates by the Credit Union National Association, credit unions’ market share is much smaller than banks’. For the purpose of market share comparison, I’m counting savings and loans — think USAA and ING Direct — as banks.

Credit Unions Banks
Household Savings 10% 81%
Non-Revolving Consumer Loans 11% 28%

I don’t have a good answer to this question of why the credit unions’ market share is so small if the conventional wisdom is that they are better than banks. I’m hoping you can help me figure out. I have a few hypothesis in no particular order. First I will share why I’m not using a credit union myself.

Banks have better products

The Citibank checking account I’m using works very well. Not only it’s free with no minimum balance, you are actually paid reward points worth $5/month to use it. My credit cards are also issued by banks, not credit unions. These cards offer better rewards. My mortgage was also funded and serviced by a bank, although this is perhaps where credit unions are most competitive.

Banks market themselves better

Banks have larger marketing budgets. They advertise on TV, radio, billboards, in newspapers and magazines, and online. More marketing brings more customers. You would think customers choose their banks by the services they get and by the prices they pay, not by who advertises more, but maybe some fall for advertising.

Banks have more outlets

Banks have more branches and more ATMs. They are on street corners and in grocery stores. More outlets mean more convenience for their customers.

One can argue that in the world of direct deposits, debit cards, online bill payment, and cash back from grocery stores, the benefit of more outlets is more perceived than real. However, whenever I go into a bank branch, it’s full of people, doing something. Some customers definitely prefer to do their banking face to face.

Many credit unions participate in the CO-OP ATM network and offer CO-OP Shared Branch services. CO-OP ATM network offers nearly 30,000 surcharge-free ATMs nationwide. CO-OP Shared Branch lets you do business at any of 5,000 participating credit union branches. The numbers are there but not necessarily the locations. If you just drive around, you don’t see credit union branches.

People don’t know they can join a credit union.

This goes with marketing. In the past you have to be an employee of certain employers or you have to be a member of an association of some kind in order to join a credit union. Nowadays there are many community based credit unions. As long as you live in certain counties, you can join many credit unions in the area. There’s even a Find A Credit Union service which lets you search for a credit union by your address.

I put in my info and I got a list of at least 15 different credit unions around me. I’m pretty sure most people can join a credit union if they really want to.

Banks are better overall

After everything is taken into consideration, people chose banks. Banks and credit unions compete for deposits and loans. Customers are looking out to their own best interests. After everything is taken into consideration, more people still chose banks.

Sure people complain about banks ripping them off by giving them very little interest for their savings and charging them high fees for overdrafts, but after all is said and done, people voted for banks with their wallets. Maybe, just maybe, the conventional wisdom is wrong and banks are actually better after all?

Now it’s your turn. Do you use a credit union for your checking account, savings account, CD, credit card, car loan, or home loan? If not, why not? If you already use a credit union, why do you think more people don’t use one?

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  1. Ted says

    #2, #3, and #4 are valid and add up. Convenience is a big thing for people. When there’s a BoA or Wachovia on every corner that is significant. I think people also perceive security in size.

    I would add that inertia is always an underrated force. People tend to stick with what they know and what they are familiar with. Most people just don’t like change. Many people are also lazy. Its not easy to change banks.

    I’ve gone back and forth with CUs and large banks for 20 years. I use which ever works best for me. My current mortgage is with a CU, my checking and HELOC are with a bank.

    I think its a false conclusion to say one is better than the other. Sometimes one is better at some things. Otherwise they both wouldn’t exist. Lord knows banks have tried their best to squash CUs, so obviously CUs do something right.

  2. [email protected] says

    My guesses: Image, location, marketing and inertia.

    Traditionally, CU were organised around big businesses or trade unions, and these days working is to passe, who wants to be seen inside a Credit Union? What with the working people?

    In my area, most CUs are located around urban areas, when they start opening branches in the ‘burbs, they’ll compete with banks for a larger customer base.

    Banks nowadays are killing each other proving how advanced their products are. At a dinner party? your bank is still available on your cell phone!

    Finally inertia: my wife had worked for banks, we always got free accounts, checks… One day I’ll get around to exploring a local CU, one day.

  3. Anonymous says

    My credit union is fine, nothing special. It’s interest rates are decent but not great. Mortgage rates are worse than average.

    Here’s my take on why people shun CUs:

    1) People are mobile. CUs are generally regional. I can be pretty sure Wells Fargo will be available everywhere in the US. Not so for First Tech CU.

    2) Who cares about interest on a checking account? Honestly, this is one of the stupidest reasons to pick a bank. Let’s say you get 2% on your checking account. If your average balance is $1000, that’s $20 over the course of a year. That’s chump change, even in the context of other chump change.

    3) CUs are relatively unknown. Everyone heard of Bank Of America, and Wells Fargo. But who’s heard of People First Credit Union? And when people think about their money’s safety, size and name recognition matter.

  4. mcfnord says

    it took me a while to realize that charles schwab had the most value. i’m reluctant to believe people actually vote with their pocketbooks. unless you’re obsessed with finance and accounting like i am, you probably settle on “good enough” without even knowing what’s possible.

  5. atlas says

    My guess is that big banks refrain from taking their customer’s money just up to the point that they don’t run them off. They do this through advertising (my bank’s name is on the local stadium, yipee!) and fluffy programs like keep-the-change.

    I just left Wachovia for a regional credit union two months ago. Wachovia began charging a $3.99/month PFM fee for downloading account activity into my personal finance software. They also duplicated ATM fees from non-Wachovia ATMs. Neither of these fees are uncommon, but why would you pay it when you don’t have to? Think about this, soulless corporate banks have one objective – to maximize profit. While you aim to save your money, they aim to separate you from it as often as possible without running you off.
    On the other hand, credit unions are non-profit organizations that are owned BY the account holders. Mine assesses absolutely no fees whatsoever. Sure, I may pay a fee to the ATM when I withdrawal from a non co-op machine, but my credit union doesn’t duplicate that fee, and I prefer to just get cash-back (if I need cash) when I make a purchase. Additionally, they offer 5% on checking and savings, (Wachovia offered 0% on checking, and 0.05% of savings), and offer lower rates than big banks on loans, mortgages, and LOCs.
    For me, it was a no-brainer.

  6. Anonymous says

    findacreditunion only works for about 60% of the states. Is there one that works for all of them?

    Fortunately, I “bank” with USAA, which I believe is a credit union. But I’d love to also have a local “bank” account, for stock power forms, a safe deposit box, and the like.

  7. Anonymous says

    I have been with my credit union for years and years. I am happy with them. No fees, higher CD rates and it seems like they look out for me. BUT after moving to a different state, I find that it is difficult to stay true to my CU without sacrificing convenience (no CU locations in new state I’ve moved to, and have to find co-op CU to make deposits). So with my hands tied, I had to open account with a bank for ease of use.

  8. Anonymous says

    Since I moved to the US from Canada 7 yrs ago, I’ve only used one “bank” and it’s the First Tech CU, then I use Fidelity for investments and 401K. I never thought I’d go to a CU when I was in Canada, it had seemed like why would I use a wig if i still have hair on the head. Anyway, I have to say I’ve been very happy with my CU. It has a reasonable savings rate of 2.667%. Free money orders. Deposit box. Yes it’s true the ATM’s are sparse compared to the banks, but I live in the ‘burb so they are still very accessible. Although no cashback, their visa is comparable to most. Same 1% int’l fee. I like most their stress-free auto-credit card payment from my checking, then i do my audits once in a while. But after reading this blog and the reader comments, I’m interested to check out the Fidelity mySmart and Charles Schwab, just to keep my options open. Last point before I forget, their human service is excellent, very personal, and I never have to feel like I need to prep for battle with heartless bankers to ask for anything I need.

  9. Castellano says

    Never use a bank for checking! I was caught just like I read once on a forum. I closed the account and it was reopened when I forgot to stop a automatic withdrawal for $15.00. The bank charged me the $15, and an overdraft fee, plus another fee for being negative. I read my email one day, about the website not being able to get the money. I said “oops” to myself and changed the account. A few days later is when I received a letter from the bank saying I owed almost $100!!

    A friend of mine is a banker, and he said they started doing that a few years ago, in order to capitalize on fees, and it was in my policy. He told me there was no reason for anyone to use a bank other than convenience, and building a relationship for a loan, but even then most credit unions can do that.


  10. Nate says

    One factor is left out in favor of credit unions. While banks would never do this, nearly 1/3 of all credit unions in the US share their branches with each other. These credit unions belong to the CU Service Centers network (see http://www.cuswirl.com for locations). This network allows members access to over 6,000 branches nationwide. Their are only 2 banks in the WORLD with more locations then any credit union in this network.

    I think the key problem for credit unions is point #2. Banks do a better job with marketing. The major reason is because credit unions give their earnings back to their member/owners while banks spend more to make more.

  11. Big Brother says

    I searched this because I have only heard good things about credit unions and was genuinely curious why more people didn’t sign up for accounts there. Some of the points made are very logical and reasonable, but I would like to say that point five is unnecessary- it is a total bare assertion fallacy. It says that banks are better than credit unions because of the fact that banks are better than credit unions.

  12. wendyef says

    I just signed up with a credit union because I hated Chase Bank so much. Chase Bank is a pack of thieves. Anyway, I am shocked because my new credit union pays 3.56% on my free checking account with no minimum up to a balance of $25,000. That was amazing to me. Also, their fees are MUCH lower and they do not re-arrange the order of debits like banks do in order to rip people off on more overdraft fees. I cannot figure out why more people don’t leave banks for credit unions other than the fact the people do not know the difference. I didn’t until I read about the differences on the internet and someone told me to check into a local credit union. If I had known about this before, I would have switched long ago. The CUs just don’t spend huge amounts advertising like the corrupt banks do. Banks are in business to take your money from you by charging ridiculous fees and doing unethical things to maximize their prophets. Usury is what banks are about.

    • Chase Bank Sucks says

      Great Point! Chase is a band of theives led by the head theif, Jamie Damon. Chase has to be about the worst bank ever, just in the bussiness of ripping you off to supply more money to Jamie Damon and his corrupt lap dogs working for him. Since I got laid off when I worked for Bank One when they mergered with Chase Bank. And of course Jamie Damon setup that deal to make even more money. And then I was laid off because there jobs overlapped in many area. That was fine got my two degrees and got a far better job then working for the corrupt banking system. And overall, the credit union is far superior to the “big” banks. The employees are not so stressed out about getting laid off to pad the pockets of the elite CEOs. And Jamie Damon is the utlimate snake and weasel. But those must be the qualifications for being a “big” bank CEO. Credit Unions are great!

  13. Aaron says

    Don’t forget that Credit Unions are insured by a seperate entity than banks. With the FDIC supposedly running low on cash that is a big plus in my book.

  14. Josh says

    Most people are too lazy to research banks they’ve never heard of. They go with big names. Definitely a sense of security with big names. If that doesn’t prove to be a false sense of security now after the past few years, I don’t know what will!

    Also location is very important. More branches with big names. 1 close to work, 1 close to home, 1 on the way to the grocery store, 1 IN the grocery store!
    Mobile access is bigger now than ever! I need a minimum of a mobile site to check balance, transactions, pay bills, etc. A dedicated phone app is preferable. Iphones are usually 1st in line 4 that.

  15. J says

    In 2007 I moved my checking account from Bank of America to First Entertainment Credit Union in order to reduce fees. I am pleased with First Entertainment’s “Value Checking” account. I also use their “First 500” savings account, which pays 7% interest on the first $500 if I use e-statements and either direct deposit or bill pay.

    This year I’m switching the rest of my finances from banks to credit unions. I am replacing my single Citibank credit card with a Pentagon Federal “Promise” card, which carries no fees — not even foreign exchange fees. This should be useful when traveling abroad and shopping at non-US web stores.

    I also signed up for a membership at Alliant Credit Union. This credit union will replace my ING Direct Orange Savings and “Electric Orange” accounts, as well as HSA Bank. I will get a better interest rate on these three services, and I will have them in one place, simplifying my finances. I’m also interested in trying Alliant’s “eDepositPlus” feature, which will let me scan checks for deposit.

  16. Harry Sit says

    J – Thank you for sharing. Clearly you are getting a better deal with credit unions. I have accounts with Alliant too. Can you tell us what took you three years to move your other accounts from banks to credit unions? And why do you think more people are not using a credit union?

  17. J says

    TFB – in my case, it was a mix of inertia, ignorance, and (until recently) coverage under a non-HSA compatible plan. I was mostly happy with ING Direct’s checking and savings accounts, and I liked my Citibank Driver’s Edge rewards. I was not happy with HSA Bank’s interest rate or investment options, but I was not sure if I could open a new HSA if I was not covered by a non-HSA compatible plan. I also did not know about the options offered by Pentagon Federal and the Alliant Credit Union.

    My first wake-up call happened early last year, when I missed a Citibank email notification that my online statement was ready. My payment was late. I got hit with a $35 late fee and about $35 worth of interest. I called customer service and explained my mistake. The rep kindly removed both the late fee and the interest charge.

    Several months later, Citibank raised my interest rate to 30%. I always pay off my balance in full, so this should not have mattered. However, I did not feel comfortable using a credit card with a 30% interest rate. The 3% foreign exchange rate bothered me, too, so I started looking around.

    I wanted a card that was *not* run out of a South Dakota bank in order to evade usury laws. Federal credit unions cap their credit card rates at 18% by law, so they seemed like a good place to start. This led me to Pentagon Federal and its fee-free “Promise” Visa.

    Along the way, I discovered Alliant and its 1.5% interest rate on savings/checking and 2.5% interest on HSAs. With its “cashless” branches and online presence, Alliant seems to be the credit union equivalent of ING Direct. In addition to a higher interest rate, Alliant offers physical check deposits, scanned check deposits, a larger ATM network and named beneficiaries for accounts. ING Direct requires that I go elsewhere if I need to cash and deposit a physical check. I also cannot name beneficiaries for my ING Direct account. Once I discovered Alliant was an option, I set about replacing ING Direct and HSA Bank with it.

    I am not sure why more people are not using a credit union. In my case, I honestly did not know better options were available. I opened a Bank of America account because it was there, not because I knew any better. I applied for a Citibank credit card because my parents used a Citibank card.

    I’m becoming aware of better options now thanks to the Internet, but most of my co-workers still use big banks.

  18. KD says

    J, thank you for sharing your experience. I have been in the US for 8 yrs and I have always used a credit union. First, at school and now in the city I work. I have always been treated fairly by them. One thing I think was different for me was I never cared for ATMs. I have hardly ever used them. So, the credit union with just a couple of ATMs but with better products and service was a better fit for me. People generally tend to use ATMs a lot and understandably, they want a bank with a large network. Besides, credit unions have membership requirements. So everyone does not qualify. But usually being a member of some particular nonprofit is a one way to gain membership.

  19. J says

    Thanks, KD.

    For what it’s worth, I think the ATM situation has improved for credit unions. Many credit unions have pooled their ATMs together into one large “CO-OP” network, creating a pool of 28,000 surcharge-free ATMs for their members.

    Another shared credit union ATM network is CU24, which claims 50,000 surcharge-free ATMs.

    Access depends on the credit union. First Entertainment members can use the CO-OP network. Pentagon Federal participates in the CU24 network. Alliant Credit Union members have access to both the CO-OP and CU24 networks.

  20. Rick Cranston says

    With shared branching, credit unions from all over the country share facilities to give members thousands of convenient locations to perform transactions just as if they were in their home credit union. Whether you are at work, home, or your favorite travel destination, your local credit union is now available thru shared branching.

  21. Nikolai says

    Another reason is that not just anybody can join any credit union. E.g., only Stanford University employees can join Stanford Federal Credit Union.

  22. A Person says

    I think this is nonsense. No one will ever make an argument as to why banks are better than credit unions. The only thing that exists concerning CUs on the internet is propaganda written by people already using credit unions…I don’t trust what any of these people say. Nor am I fan of major banks. My theory is that y’all’re all liars.

  23. Nic says

    I have been with my credit union since I was 13 years old. I even moved away to a place where I can’t access my credit union physically and I still don’t have issues. Mainly because my credit union is part of a larger network, meaning that I can go to other credit unions and get the same service, for no additional fee. I also do more online banking than ever before.
    I personally think more people use bigger banks because they are actively pursued, and they perceive it as a hassle to change banks. I also think that big banks create incentives to stay and make it feel uncomfortable to switch out.
    Credit unions charge less fees in total, have among the best customer service I have ever received as a consumer, and have incredible rates for being a member.
    I always recommend joining a credit union to everyone I know.

  24. Ivan says

    My biggest reason for not having a checking acct with a credit union are the service terms. My friend had a trouble using her card during weekend. She wasn’t able to reach anyone at her CU until Monday. I wouldn’t like to end up in a situation where I am travelling in another time zone, have to pay $2000 for my hotel, the transaction fails due to limit on purchases abroad and I can’t reach the bank because it’s 2AM there.

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