Bank or Credit Union: Where Is Your Money Safest?
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You likely consider the level of customer service, deposit rates and the presence of a community feel in where you deposit your money. The safety of your money figures as a very important factor, as loan defaults and poor policies may cause stress that the bank or credit union might not handle. Below, we examine the factors that can help you determine if a credit union or bank is safer for your money.
The Profit Motive
Credit Unions exist as nonprofit organizations. As such, they do not answer to shareholders seeking to maximize their investment values. In fact, many directors or governing officials of a credit union likely have deposits or loans through that union. As such many of the decision makers hold a personal interest in the practices of the credit unions. This and the absence of shareholders reduce the pressure or motive for a credit union to make riskier loans. In fact, credit unions face certain limits on the amount of commercial loans they can underwrite.
Also, banks that operate under a profit motive might have more of an incentive than credit unions to engage in fraudulent behavior. To bolster revenues and profits, Bank employees might open accounts without the knowledge of customers.
The FDIC (Federal Deposit Insurance Corporation) insures a customer’s deposits in a bank account up to $250,000. If you’re in a federal credit union or in most state credit unions, the National Credit Union Association (NCUA) covers your deposits up to $250,000 in case of a failure. From the standpoint of insurance, banks do not present more risk than the vast majority of credit unions.
Some state credit unions do not have federally-backed deposit insurance, but rely on private insurers to protect their members’ deposits.
For credit unions, defaults in loans may bring lesser consequences. On average, banks have more resources and funds for loans than credit unions. The disparity is a function of membership requirements among certain credit unions that limit the number of depositors, while banks do not have such restrictions. Some credit unions tie eligibility to become members to employment or affiliation or membership with a particular organization. The limited number of depositors translates to a smaller pool of money for loans. Defaults of smaller loans might not bring the extent of losses as you may find with banks.
Credit unions may stunt the impacts of defaults and bankruptcy through cross-collateralization. This allows the institution to secure all loans—car loans, credit cards and mortgages—through any collateral for any loan. For example, the home secures not only the mortgage, but credit cards or personal loans.
With cross-collateralization, credit unions stand a better of chance of debts being paid through bankruptcy. The law requires that secured claims be at least up to the value of the collateral securing it. If you’re a debtor, you may have to make substantial payments to a Chapter 13 trustee to keep your property in a bankruptcy. Banks and most credit unions offer most depositors ample insurance for losses. In that sense, both types of institutions are generally safe places for you. However, take the particular practices of banks and credit unions into an account when you assess risks that some loss or stress may occur.
Anita Ginsberg is a freelance writer from Denver, CO. She studied at Colorado State University, and now writes articles about health, business, family and finance. A mother of two, she enjoys traveling with her family whenever she isn’t writing. You can follow her on Twitter @anitaginsburg
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