Because there are so many banking options these days, your head might be spinning as you decide where you should keep your checking and savings accounts, as well as where you should apply for loans and credit cards when you need them.
Truth is there is not just one place to do all of that.
Here is some down-to-earth advice on how to use your local credit union and a traditional bank at the same time to handle your finances responsibly with an eye toward improving your credit and securing a future car loan, credit card or mortgage at the best interest rate.
Understand the main differences between a credit union and a traditional bank
While both credit unions and banks have many of the same offerings of checking and savings accounts, credit cards, auto loans, mortgages and interest-bearing savings vehicles as well as federal insurance up to $250,000, how and why they do it bear obvious differences.
- Ownership: Credit unions are not-for-profit, cooperative banking institutions owned by their members and managed by a volunteer board of directors, which mainly answers to and supports the members.
A traditional for-profit big bank is governed by an outside board of directors, shareholders who must be satisfied by profit first.
- Mission: Credit unions have a common mission to encourage members to save and also to better their financial lives by offering a source of reliable and trustworthy credit, especially for helping low-income members.
When a credit union makes decisions about interest rates, fees and services, it is always for the benefit of the members.
When traditional investor-owned banks set rates, fees and services, it is for the profit of the shareholders and board of directors.
- Tax exemption: All credit unions fall under the Federal Credit Union Act and receive a credit union tax exemption to foster the development of more banking options.
- Fees: In comparing traditional bank fees with credit union fees, Bankrate’s 2016 Credit Union Checking Survey found fewer checking fees associated with credit unions and overdraft fees and ATM fees tend to be cheaper.
In fact, 76% of credit unions offer free checking. Less than half of that percentage of the big banks offer free checking. Big banks almost always charge a monthly service fee if your funds fall below the stated minimum balance or there is no direct deposit associated with the account or other criteria.
- Services: Banks are able to grow larger because they can raise outside capital and raise profits through raising fees while credit unions are restricted from obtaining outside capital and their mission often restricts them from raising profits through raising fees. To keep services affordable for their members, often a credit union may eliminate some services, conveniences or products in order to cut costs instead of raising fees.
Use traditional banking for daily convenience
Most big banks often have thousands of convenient branches and a lot more money to invest in technology for online banking and smartphone apps to make controlling and tracking your money much easier. Many credit unions also have excellent online banking and intuitive apps, but if yours doesn’t and you rely on using your phone for banking, you may want to keep your basic checking account, direct deposit and a linked savings account and business accounts (if you are self-employed) at a traditional bank just for convenience and every day money use. You will be making the most of using technology for linking your business accounts with your personal accounts to transfer funds, pay others, pay bills and keep track of your daily balances.
Also, if you travel for work, a big national bank can make it all easier because of the thousands of national branches for ATM use and customer service everywhere you go and most also have online tools to help you separate and track business expenses for reimbursement and taxes.
Now, add some credit union accounts to help improve your credit
When it comes to creating a relationship with a bank and taking advantage of products and services to help improve your credit, your local credit union can’t be beat, if you can become a member. Credit unions have widened their membership requirements lately, so always research the eligibility requirements to see if you can qualify for membership based on your location, your job or your school. Then, open up an additional savings account for your emergency fund to keep it separate from your everyday checking account.
You can usually add more than one account to your employer’s direct deposit form so even if most of your income goes to your regular checking account at the other big bank, add another account to the form to siphon off whatever amount, no matter how small, you can have automatically deposited to your separate credit union savings account in case of an emergency. The other reason for this account is when it comes time to ask for a loan or a credit card, you will already have a relationship with the bank.
While mortgage rates and credit card interest rates are comparable to the big banks, where credit unions typically shine at helping you improve your credit is in the auto loan arena. If you’re in need of a first-time loan or if you’re currently stuck in a high interest loan, you may be approved easier to finance or refinance a new or used auto loan at the credit union at a lower interest rate than at the big bank, where you might not even be approved.
Here are some typical auto loan rate differences, tracked by the National Credit Union Association during 2015:
Used car loan, 48 months: credit union average was 2.76% compared to the big bank’s 5.14%
New car loan, 60 months credit union average was 2.69%, compared to the big bank’s 4.73%
If you plug these numbers into any car loan calculator you can see that just a couple of percentage points higher equals more than $1,000 more paid for the car loan and nearly $20 difference in monthly payment for 5 years. If you want to pay less, the credit union is more likely to have the car loan for you. If you make your payments on time, this can help you build a positive credit history and a good credit score making getting the best interest rates for a credit card or for a mortgage with any lender more likely.
Don’t get stuck in a rut with just one bank and use the different types of banks that suit your specific needs each for their best product or service to help you keep control of your money and build your credit.
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