Occam's Razor

So I am at the Gold’s Gym listening to a Marketplace Money podcast. I am hearing all the details of the new credit card law freshly signed by President Obama this week. The law was certainly overdue, given the egregious ways banks lately have been unilaterally raising interest rates, changing credit card terms and tacking on usury fees.

To me the whole credit card debate was moot. I like millions of other Americans do not worry that much about my credit card interest rate or fees. Why? I get my credit card through my credit union. Its credit cards work just as well as the banks’ credit cards, but with better rates and less volatility. I don’t worry that much about my credit card interest rates going up or down because my credit union has no financial incentive to shaft me. This is because when I put money in the credit union, I become part owner of the credit union too. Credit union management is not going to want to tick me and the other members off that much because if they did I can petition that they be replaced. A credit union exists to serve my interests, not theirs.

Now, if I had an account at a bank, like Bank of America, I would merely be a customer. Bank of America would see me as a profit center. It would have every incentive to squeeze every possible dime out of me. Banks nationwide are trying to make up for declining profits and bad loans by squeezing their customers. Investing customers’ money is not very profitable anymore, but they can make customers pay more just so they can use money. Hence, the higher fees and interest rates on credit cards, as well as many other loans they may offer.

For about a quarter of a century my wife and I have put most of our working capital into credit unions. Would I close a credit union account and go with a bank instead? Hell no, not unless I had no other choice. I haven’t worked in the Pentagon since 1998 but I still belong to its credit union. In fact, my relationship with the Pentagon Federal Credit Union has deepened since I left. I not only have savings and checking accounts with them, I also have a personal credit card through them. My wife and I also have our home equity loan with them that we can draw on up to $100,000.  Our credit limit has remained unchanged even with all the financial uncertainty. We also have our mortgage with Pentagon Federal. The only downside is that I no longer want to visit a branch office, since it is twenty miles away. However, I can get my money out through no-fee ATM machines where I work or one a mile from my house. If I have checks to deposit, I just mail them in. It costs me a postage stamp and a couple days.

You may be thinking, “Credit unions are all right for you, because you work some place that offers a credit union. What about the rest of us?” In many communities, you still qualify for membership in one or more credit unions. Check it out. I live in Fairfax County in Virginia. Down the street is a local branch of the Fairfax County Federal Credit Union. What are its qualifications for joining? You simply have to live in Fairfax County.

What are you losing by joining a credit union as opposed to a bank? These days, you lose virtually nothing. Both banks and credit unions are fully insured, just by different institutions. (In fact, credit unions have been markedly more stable than banks during the current financial crisis, probably because they are better managed and more risk averse.) Some communities may not yet be served by a public credit union, so you may have little other choice than to put your money in a local bank. You may also have to drive out of your way to get to a credit union branch office. Banks can now offer brokerage services, although some credit unions have separate companies that also offer brokerage as well as real estate services. Bankers though have proved to be poor brokers, as witnessed by the recent stock market collapse. Most credit unions now offer services that you used to have to go to a bank to get, such as mortgages and home equity lines of credit. After more than twenty-five years of using credit unions, I can state that their checks, ATM and credit cards work just like the banks’.

For many of you, the only question may boil down to: do you want to socialize your money? You are not really socializing your money, but credit unions are similar in concept to a food cooperative. When you join a credit union, you are taking a philosophical stand that you should get maximum value for your money. You are betting that by pooling your money with others you will all make and save more money than you would at a bank, which these days is a very safe bet.

Here is how I look at it. Credit unions like banks really should not be where you put your long-term investments. Yet, some part of your money needs to be invested for the long term. Most of us do this through 401-K accounts through our employers, but many of us also need brokerage services so we can buy stocks, bonds and mutual funds. Long term investing is a different problem than having financial instruments to take care of our ordinary financial needs. Savings and checking accounts, credit cards, loans and mortgages are now just commodities. A credit union though offers a way to keep much more of your money while having access to all these financial instruments. My credit union, for example, does not charge any checking account fees, nor does it assess a charge for sending me a paper bank statement. If I use the right ATM, I do not have to pay for the privilege of withdrawing my own money either. I have no idea how much money I am saving compared to the bank you may be using, but I bet it amounts to hundreds of dollars a year. If you can too, then why would you want to give this money to a bank? Wouldn’t you rather do something else with your money?

Particularly in these turbulent financial times, if you have access to a credit union, consider joining. I expect your experience will be like mine and you will be wondering why you waited so long.