Credit Union or Big Bank: Which is Better for Managing Your Money?

[BobG]

What do you guys think about the advantages/disadvantages of being at, say, BofA vs being at a local credit union?

For a savings account and for loans, it seems that credit unions take the cake with their low interest rates and (relatively) bigger returns on savings.

But for getting a credit card, an account at somewhere like BofA or Wells Fargo seems like a better deal. Or maybe it's better to get a credit card through a third party.

I'm trying to decide how to manage my money (between spending, saving, paying back loans and investing). I'm also starting to build up credit (but don't yet have a credit card).

Any advice and/or comments?

There was a time when banks were more secure than credit unions (at least in the US). Since the savings and loan scandals (1980s or 90s?) and the resulting changes, there's no significant difference.

The only exception would be if you actually belong to the group supporting the credit union and are gaining some secondary benefit from the credit union. For example, most military bases have credit unions that focus on military personnel. Most of those credit unions would pretend that military members got their paycheck even if government shut down and quitting paying military people - in essence, an interest free loan. But, even that hasn't been very significant recently, as Congress has been certain to make military pay an exception to any government shutdowns (how could you stop military pay when we were fighting two simultaneous wars).

And, yes, paying your credit card bill in full every month before any interest comes due doesn't help your credit score much, if at all (and it may even decrease it). You've reduced the perceived risk, but you've also eliminated the reason companies want to loan you money in the first place - they want to make a profit off of the interest. I don't think paying off your balance every month would hurt your chances of getting a regular loan, but it can motivate a credit card company to try to get you switched to a card with annual fees.

 

[jim hardy]

I don't think paying off your balance every month would hurt your chances of getting a regular loan, but it can motivate a credit card company to try to get you switched to a card with annual fees.

Credit card company hits the merchant for around 3%
so if you have more than a trickle of cash flow they are raking in plenty.

I use mine for gas and travel. At $50 a tank it's no wonder they're happy.


old jim

 

[jbunniii]

And, yes, paying your credit card bill in full every month before any interest comes due doesn't help your credit score much, if at all (and it may even decrease it). You've reduced the perceived risk, but you've also eliminated the reason companies want to loan you money in the first place - they want to make a profit off of the interest.

I don't think the credit bureaus actually know whether you made a full or partial payment. All they know is whether you made an on-time payment. The bank will report that you made an on-time payment if you paid at least the minimum payment and it was not 30 days late or later. The bank also reports your balance each month, but this isn't enough to determine whether you paid it off or not. I believe the following two scenarios will look identical to the credit bureaus:

1. Your balance is $1000 in June, you pay it off on time and in full, and you charge another $1000 in July.

2. Your balance is $1000 in June, you make the minimum payment (say $20) on time, and you charge another $20 in July.

Of course in case 2, you will pay interest and in case 1 you will not. But I don't believe that matters from a credit reporting/scoring standpoint. Certainly if anyone tells you that you have to carry a balance/pay interest on your credit cards in order to improve your credit score, they are repeating a myth.

Unfortunately, to maximize your credit score, you apparently also need "diversity" of types of loans, so you may need a mortgage or car loan or some other non-credit card loan (which of course will require paying interest) if you want that 850 FICO score. But I was able to average over 800 for many years with only two credit cards, paid in full every month, and no other type of loan.

 

[SteamKing]

That is a huge credit limit. Who actually needs that much?

I once had a card with a credit limit of about $50K on it. The regular interest rate was about 23% on purchases, so I didn't use it very much, at least not without paying down any balances very quickly.

If you have good credit, you'll get scads of offers to sign up for various cards: you'll get a bunch of offers from the very same bank or banks thru which you might have any existing cards.

A lot of this occurred before 2008, and the worst offenders at mass-mailing credit card offers have now fallen by the wayside due to subsequent events.

Now, I didn't get a credit limit of $50K all at once from Day 1 of having the card. Depending on whether you use a particular card very little or a lot, the banks will raise your credit limit periodically, and if you keep your credit history clean, the banks saw no reason to stop.

 

[AlephZero]

Credit card company hits the merchant for around 3%
so if you have more than a trickle of cash flow they are raking in plenty.

But why would a card company be happy with 3%, if they can find clueless people who are dumb enough to roll over $10,000 of debt indefinitely and pay 26.9% APR on it?

 

[Vanadium 50]

Because that 3% is pretty much guaranteed. The odds of ever seeing that $10,000 again are far front certain. At the peak of the financial crisis, cred card charge-off rates were over 10%.

 

[jim hardy]

But why would a card company be happy with 3%, if they can find clueless people who are dumb enough to roll over $10,000 of debt indefinitely and pay 26.9% APR on it?

There was a PBS documentary on that subject.
http://www.pbs.org/wgbh/pages/frontline/shows/credit/
and a followup
http://www.pbs.org/wgbh/pages/frontline/creditcards/

 

[AlephZero]

Because that 3% is pretty much guaranteed. The odds of ever seeing that $10,000 again are far front certain. At the peak of the financial crisis, cred card charge-off rates were over 10%.

That problem was easy to fix. Just find people dumb enough to take short term loans at 2,000% APR, not 26.9%. http://en.wikipedia.org/wiki/Payday_loans_in_the_United_Kingdom

 

[Vanadium 50]

In the interest of full disclosure, I used to be a payday lender - specifically, I held stock in a payday loan company. I left because it was not profitable enough.

Some things you might not know.

The business model of these firms is to undercut banks on late charges. (And this is why this is relevant to this thread) If you bounce a check, between bank charges, late fees and other vendor fees, you're looking at $40-60. Typical payday loans are $15 per $100. The bulk of loans are small: $100-200.

It costs about $13.50 to set up a $100 loan. This includes the building, the personnel. the financing, etc. So you can see that the pre-tax profit is about 10%. Goodwill, which is nonprofit and pays no tax and works out of their existing storefronts, charges $12. So the profits are not that large.

The customers - my customers, if you like - are not the Rockefellers. They are living paycheck to paycheck. They fall into two categories:

A. This person uses the service once or twice a year, to solve cash flow problems usually generated by unexpected events. ("unexpected" defined loosely - "the car insurance was due this month?"). The risk of nonpayment is small. Most customers are in this category.

B. This person is a chronic user, rolling over loans all the time. They often have loans from multiple places, and are borrowing from one to pay another. The risk of nonpayment is large. Few customers are in this category, but they generate a lot of loans. For some places, the majority of loans.

If the business could deal only with A's, it would be a lot more profitable and there would be fewer complaints. It costs about $150 to determine someone credit-worthiness - tell the A's from the B's. That's what it costs to run the credit reports and to pay someone to look at them and make a decision. This can't be done profitably on a $100 loan.

 

[Vanadium 50]

By the way, the customers - again, my customers, I suppose - are not dumb. They are poor, but not dumb.

The A's know they are getting a bad deal, but a deal better than anyone else can give them. The B's don't care about the deal they are getting, because they don't intend to live up to it.