In answering the question "What is a credit union?", most people have the same answer "It's just like a bank, but...". Well, in the case of products and services, that's usually a pretty good descriptor. Saying credit unions are just like banks is an easy way to let whomever is asking the question, know that credit unions have checking accounts, loans, debit cards, savings accounts, credit cards, and other traditional banking products.
But how does that answer end? "It's just like a bank, but..."
Often times those of us that know banks and credit unions are different aren't exactly sure how. Or maybe we just aren't sure how to explain it. Well, there is very major difference between these types of financial institutions, and here it is, in a nutshell:
Banks are for-profit businesses that answer to investors. Credit unions are not-for-profit and member-owned.
Basically, think of the money in your bank accounts as money you are lending to the bank that they will invest to make a profit. And much like any other business, the bank will make these investments based on which will turn the greater profit. And, at the end of the day, all of the decisions made for the bank as a company, that will in turn affect bank policies and customer fees, will be made based on investor happiness and what can garner the most revenue for the bank.
Credit unions, on the hand, operate under a not-for-profit business model. Not-for-profit is not the same as nonprofit, which is a term you may be familiar with in regards to charity organizations. Nonprofit means that an organization is dependent on donations to survive. Not-for-profit simply means that any profits that a credit union makes are returned to its members in the form of lower loan rates and higher savings rates. And, if it so happens that there is any revenue left after making all of these adjustments, credit union members can receive dividends.
So what kind of financial institution is best for you? Of course each individual's financial and personal needs are different. But here are a few items you should consider when choosing your financial institution:
- Turning a profit has its benefits. The big banks have tons of locations, nice and new branches, and many conveniences and technical advances that many smaller financial institutions cannot afford to offer; think robust mobile apps, remote check deposit, etc.
- You're the boss. A savings account is not just a savings account at a credit union. CUs call these "share accounts" for a reason; because it is your share in the ownership of the credit union. And while banks are answering to investors, credit unions answer to their members. CU members even vote for the board of directors for their credit union and voice their opinions at annual meetings.
- Investments aren't the only way to turn a profit. A couple of years ago, consumer frustration with big bank nickel and diming practices culminated in Bank Transfer Day. November 5, 2011 was deemed Bank Transfer Day in a movement of consumers that were fed up with being charged fee after fee by big banks. Not only were these banks raising existing fees, but they were also adding new fees, like Bank of America's now infamous proposal to charge its customers $5 monthly just for having a debit card.
- If turning a profit has its benefits, then no profits must have some disadvantages. Most credit unions are smaller and more local in nature. And sometimes that means that the conveniences that larger banks can offer, like the technological advances and multitude of branches we mentioned earlier, are not as easy to come by. But, you should also know that credit unions are much more cooperative in nature and don't have the competitive spirit found between big banks. So how does that help solve some of the CU inconveniences?
1. Shared Branching. Shared branching is a partnership of credit unions that
allows credit union members to perform financial transactions (deposits,
withdrawals, transfers, loan payments, etc.) at partner credit unions just as the
member would at their own credit union.
So even if your credit union doesn't have a branch near your home or office, or
you're across the country on a trip, chances are that one of the over 5,100
shared branching participating credit unions is close by if you need them.
2. CO-OP ATMs. So you don't necessarily need a credit union branch, you just
need some quick cash from the ATM. BUT, you don't want to pay a huge fee,
right? Most credit unions participate in the CO-OP ATM Network of almost
30,000 ATMs across the country that members can use just as they would their
own credit union's ATMs. Fash cash with no fees. And many of them even take
deposits.
- Service with a smile. This is last, but certainly not least. Another advantage of the smaller, community nature of credit unions is the impeccable and friendly service. The hustle and bustle of long lines just don't lend themselves to remembering customer names or customer relationships with banks. But, credit unions provide something much different. So, don't be surprised if you're are greeted with "Good morning Mr. Smith" when you walk into your credit union, as opposed to someone asking for your account number or debit card.
We are obviously biased, but the advantages to joining a credit union seem to far outnumber the disadvantages. And contrary to semi-popular belief, you don't have to work for an employer with credit union ties to join one. Many credit unions do have restrictions on who can be a member, but many of those restrictions are as simple as living in certain counties or cities; which isn't much of a restriction at all.
The terms "unbanked" and "underbanked" are being used quite a bit lately; mostly by financial institutions and local and federal government officials advocating safer financial practices for their communities. But, how many of us know what these terms mean? And what's so great about being "banked" anyway?
Let's run through the definitions first. The FDIC defines someone without a bank account, credit union account, or another financial institution account as "unbanked". "Underbanked" typically means that, while someone may have a bank or credit union account, they also routinely subsidize that account with other non-traditional financial products like payday loans, check cashing, or pawn services.
Currently, there are about 60 million adults that are underbanked or unbanked entirely. So why is this a problem?
Well, if you are someone who is banked, you probably don't worry about cashing your paycheck, social security check, or even just a personal check from a friend or family member. You simply deposit the check into your account, right? If you don't have a bank account, however, you would probably resort to a check cashing store to redeem a check. National studies have shown that the average check cashing fee is between 2-6%. Imagine paying $20 - $60 for every $1000 payroll check! That's money you have earned that you could be spending on food, gas, or clothing; and now you no longer have that option. To make matters worse, some of these stores charge up to 20% of the value of the check they are cashing.
The unbanked and underbanked are also missing other services as well. Because the underbanked don't have strong enough relationships with financial institutions, and the unbanked have no relationships at all, they often turn to payday lenders for high interest rate loans or cash advances when they are in a financial bind or need to supplement their income. And considering that payday lenders often have service fees ($15 - $20 per loan term) plus outrageous interest rates that can range from 300% - 750% (APR), this is a very pricey and risky alternative. Many people end up paying back $300 - $400 or more to payday lenders for a $100 loan.
Another type of short term loan that has grown in popularity is the car title loan. Many car owners that are struggling financially are offering their car titles for cash by lenders who are known to charge triple-digit annual percentage rates (think 250%!). The loan terms are typically pretty short, around 30 days. The problem is that if the consumer didn't have a few hundred dollars initially, they are very unlikely to have twice as much money in 30 days to repay the loan. So, many of these car owners are rolling over their loans for months until the repayment amount is nearly impossible to obtain, and eventually getting their cars repossessed. The car title lenders are then selling the consumer's car and keeping 100% of the profit. And the consumer is left with nothing; no cash and no car. While car title loans are generally considered a "predatory lending" practice, they are not illegal.
So how could being "banked" help in these situations? Many financial institutions offer short term loans or regular credit cards that would allow someone who is struggling financially to make it through the month, or several months, for much lower interest rates. Even the short term loans and most any kind of loan from a credit union, are offered at rates that are a fraction of those given by payday or car title lenders.
The problem that some people run into is with credit checks/scores. But part of a long-term solution for this would be to do something like a "credit builder" type loan that many financial institutions offer. They allow you, if you don't qualify for a traditional loan, to secure a loan with your own money deposited into an account. When you make payments to this secured loan, the payment history, etc. will still work to improve your credit score.
And a credit card could also alleviate some frustration and give you more flexibility in months that you are short on cash. Even if you don't have the most desirable credit rating, a 19% interest rate is still much better than a 300% interest rate.
There are other reasons that being banked is much better than being unbanked or underbanked. Here's one more: Safety. If your credit card or check book is stolen, those items can be reported stolen and cancelled. Even your debit card can be frozen by your financial institution. But, if your entire paycheck is in your pocket or wallet and is stolen, you will never see that money again. Not to mention, people that steal wallets, aren't always nice in their means to get your wallet.
Other reasons to be banked include: having your money protected by the NCUA or FDIC, the helpful budgeting element of online banking that most financial institutions offer, interest bearing accounts, and much more. If you aren't yet with an financial institution, the time to get banked is now!
Home ownership seems like a very grown-up proposition, doesn't it? There's just something about mowing a lawn and making repairs that reminds us of our parents.
But, a home doesn't just mean a house in the suburbs. It can mean a condo or a townhome, too. Given that, home ownership can really make sense for a variety of different people.
So what does "make sense" mean exactly? Well, there are many benefits to a mortgage loan that you may not be aware of, like: payment stability, tax advantages, equity, as well as many other intangibles.
Let's start with payment stability. If you are renting then you probably have come to the understanding that your landlord/complex can raise your monthly rent payment due to inflation everytime your lease expires. To make matters worse for the renter, rent hikes aren't always just due to inflation. The rental market is just like every other business and varies greatly depending on demand. According to the Dallas Morning News, North Texas rents have gone up 15% in just the last 5 years. And that makes perfect sense when you think of that time period in relation to the extreme economic downturn from which our nation is still recovering. If tons of people were foreclosed on or laid off about 7 years ago, then there was bound to be a huge demand for apartments in the years to follow, right?
On the flip side of this coin is the fixed-interest rate mortgage loan. If you were to buy a home and financed with a fixed-interest rate mortgage, then you would pay the same monthly principal and interest for the entire term of your loan; whether that is 30 years, 15 years, or somewhere in between. Not so coincidentally, now is a great time to embark on a mortgage loan with low loan rates being so prevalent.
Did we mention there are tax advantages to owning a home? We are not tax experts, but we can at the very least tell you that mortgage interest and property taxes are tax deductable. The deduction you can take due to your mortgage interest will be your biggest tax break. However that benefit is limited if your loan is for a million dollar home (or more). There are also deductions regarding energy efficiency and "points" (regarding the fees or charges you may have paid to obtain your mortgage loan), but, we would advise you to see a tax specialist to delve into those.
Another huge advantage to home ownership is the equity you build! What is equity, you ask? Equity is what builds when your home increases in value and you have started to pay off your mortgage loan. Bascially, it is the value of your home beyond what you still owe in mortgage payments. Once you've built equity, you can borrow against it in the form of a home equity loan to pay for a variety of things, think: home improvements, college tuition, or retirement planning. You can even use it as an opportunity to consolidate some bills or go on a vacation. There are many, many possibilities here.
Some other more intangible benefits include community stability. Buying a permanent place to live will help you and your family bond with neighbors, allow your children to have a consistent school environment and classmates, and can even make decorating a little easier; no more puttying old nail holes in the wall when you move!
Of course, with all of that being said, there are still plenty of times when home ownership may still not be right for you. Not sure you've found your perfect city? Think your job may relocate you? Do you want to wait until you have a spouse and children? All of these are legitimate reasons to wait.
But now that you know all of the benefits that come with owning a home, hopefully you will feel more confident in your decision when you are ready.
The word "budget" usually evokes a few words with negative connotations in many people's minds; words like can't and don't, as in "You can't eat out" or "You don't have funds available for those new shoes". But, all a budget really is, is a plan for how much money you will spend this month or this week. That's it. That doesn't sound too terrible, does it?
Of course, if you have been spending more than you can afford or you are setting a new savings goal, then setting a budget may come with a few constraints.
But, the most difficult part of preparing a budget is remembering every expense you incur each month; although, with the help of online banking and credit card statements, it's not really as hard as you think it is. Here are a few basic expenses that most of us incur:
• Mortgage/Rent
• Utilities
• Home/renters insurance
• Car payment
• Auto insurance
• Phone bill (land lines & mobile)
• Cable/Internet bill
• Credit card payments
You might also have some less common, but recurring expenses like a gym membership or student loan payments to consider.
And then, there are a few other expenses that are sometimes difficult to estimate but should still be part of your budget. Such expenses are:
• Gas
• Groceries
• Clothing/Shoes
• Entertainment
(movie tickets, Netflix subscription, dining out, video games, etc.)
Honesty is the best policy on these items. It doesn't really help your efforts to save if you tell yourself that you spend $25 per week on entertainment, when in actuality it's closer to $60. Get a true assessment over three or four weeks on your gas, groceries, shopping (clothing/shoes), and entertainment expenses.
If you're really anxious to get started, you can use your last receipt amount for all of those things, but be sure to take into account whether or not that last receipt amount reflects your normal behavior. Maybe you spent $150 on gas in the past two weeks; but were you driving more than normal due to a family emergency or was it the one week per month that you drive a ton for work? Did you only spend $20 on entertainment because you were away on business or you had the flu and didn't feel like venturing out and you'd normally spend more? Also, don't forget that the Clothes/Shoes category doesn't just include a brand new pair of running shoes or a new suit. It also includes the not-so-fun-to-shop-for items like socks and undergarments.
Your entertainment bill will probably be the most difficult to assess because you probably do different things from week-to-week for fun; dinner with friends, a movie with your family, or maybe there was a special holiday festival in town, etc. The best way to handle that is, again, to get an idea of your average spending over several weeks.
Your grocery bill will most likely be easier to estimate. Most people buy enough food to stock their refrigerators for one week and we tend to buy the same foods to prepare each week, so this won't be too difficult.
You will also want to enter a slot in your budget for miscellaneous expenses. These are the things that you spend money on that may not fit perfectly into any of these categories. Do you visit Starbucks every morning on your way to work? Or once a week? If you're like us, then you're probably ordering the oh-so-delicious warmth of a Cafe Mocha or Vanilla Latte, and that could cost as much as $4 or $5 per visit. Are you a smoker? How often do you buy cigarettes and in what quantities? Both of these things are examples of non-categorized expenses that can add up in a hurry, so don't forget to consider them in your calculations.
Lastly, don't forget that emergencies happen. You don't want to use every last cent available to you and leave nothing for: car repairs, home repairs, trips to the vet, and anything else you wouldn't normally need to purchase, but may crop up unexpectedly. Of course it's unrealistic to plan for an unexpected $400 car repair. That is just too much money to set aside. But, the idea is that if you set aside $50-100 every month and not use it, in just 4-8 months, you will be able to handle those rare emergencies without maxing out a credit card or borrowing money.
So, now that you have a handle on what your expenses are, how do you track them all from month-to-month? Well, we at Lone Star Credit Union, happen to like a good Excel workbook. But, if the idea of inputting numbers and formulas into a spreadsheet isn't your idea of fun, consider using a budgeting software like BudgetSmart. The BudgetSmart download is free on our website and can track your spending for you and even give you some advice on where you could cut back if you'd like.
Speaking of cutting back, how do you begin to increase your savings now that you have a budget started? Well, the first thing to do is to determine your goal. Is your goal to save up for a down payment on a new vehicle? Is it a new home? Retirement? Or just some general savings for a rainy day?
Once you have that number in your head, start thinking about how much you can reduce your expenses each month. Then, you'll have a good idea of when your goal will be met.
But, how do you figure out what expenses can be reduced? For this purpose, it will really help to list your expenses in order of importance. Obviously your mortgage/rent payment will rank much higher than your daily Cafe Mocha. But, try to rank every expense regardless of how silly the process may seem. Once your list has been compiled you'll probably have a good gauge on what is expendable. And if you are really looking to cut back after doing away with trips to the mall and going to the movie theater, then think about how some of your larger expenses can be reduced. Can you refinance your car for cheaper payments? Renters: can you live in a smaller, more inexpensive apartment?
Last but not least, remember to give yourself SOME play money. If you aren't living paycheck-to-paycheck, then it's probably not a bad thing to have that Cafe Mocha every now and again. Restricting your budget too much will surely foil your plan to stick with it.
Generally, most people know that a good credit score means more opportunity for you in terms of how low your interest rates can be and how much credit lenders are willing to give you. But do you have a number in your head that represents "good"?
The FICO scale ranges from 300-850, and of course the higher your score, the "safer" you are considered and more likely to receive low auto loan rates, mortgage rates, etc. But where between 300 and 850 does "good" fall? Here is a good general reference:
Very Poor: Below 579
Poor: 580-619
Average: 620-659
Good: 660-699
Great: 700-759
Excellent: 760 and above
But, don't be fooled by that spectrum. Those are general ranges provided by FICO. Individual lenders set their own guidelines for who can receive the lowest auto loan rates, mortgage rates, credit card rates, etc. For example, before our country's recent financial crisis, many lenders considered a score of 720 enough to make one eligible for their lowest tier of rates. However, since the crisis, a score of 740 and higher is now considered the new threshold by many.
So how can you begin to know if you are eligible for a low auto loan rate? Or an auto loan. Period. Well, first things first: find out your current credit score. Maybe you will be pleasantly surprised or maybe you will be better off waiting a few months for your loan.
You can get one free credit report from each of the three major credit bureaus (TransUnion, Equifax, and Experian)once every twelve months by going to AnnualCreditReport.com. Your credit report will contain everything from your credit accounts (think bankcard, mortgage, auto loan, etc.) with your corresponding account open dates, limits, balances, and payment history to your credit inquiries (voluntary and involuntary), as well as any delinquent items that you may have in collections.
It is important to read through everything listed in your report. Make sure that everything listed is in fact yours; erroneous information has been known to appear by no fault of the individual. Once you know what is there, you will know what you can take note of any "dings" on your credit, such as late payments, collection items, etc.
One very important note is that your credit report is not the same thing as your credit score. In fact, when you receive your free credit report your numeric credit score will be nowhere to be found on the report. The score itself is a separate measuring tool that will need to be purchased, although rather inexpensively.
And, there's just one more caveat. Each of the three major credit bureaus has their own score for you, which can all be different from each other. So, your TransUnion score could be 700, your Equifax score could be 710, and your Experian score could be 687. Some lenders obtain all three scores when making lending decisions, others have one preferred bureau.
While your report and your score are two separate items, you will need to obtain both to be prepared to make improvements if need be.
And now that you know how to start on the path to getting the lowest rate auto loan, do you know what to do when you get to the dealership?
First and foremost, figure out what you can afford. It’s difficult to hear the total cost of a car and know if it fits into your budget comfortably, barring extreme examples, like luxury vehicles that cost in the hundreds of thousands of dollars.
For example, saying, “Can I afford a $24,000 car?” may not be easy to answer. But, thinking in terms of your monthly budget makes it easier. “Can I afford $400 per month?” is much simpler to figure out.
Of course, the amount of your monthly payment depends on many factors aside from just the total price of the vehicle. Using a financial calculator, like the one you can find on LSCU’s website, can help you factor in other considerations like your down payment, trade-in value (if you have one), the term of the loan you would like to consider (60 months is pretty standard), as well as sales tax and some other miscellaneous fees.
Within the calculator you can adjust all of these factors and work to find what works best for your budget. You can even select “Monthly Payment” or “Purchase Price” depending on what number you are looking for: select “Monthly Payment” if you have a price for a specific car that you’re interested in, input the other factors (down payment, trade-in, etc.) and figure out a good estimate for what your monthly payments will be if you purchase that car, and if those payments fit into your budget. Or, select “Purchase Price” and input the ideal amount for your monthly payment, input the other factors, and see what purchase price is in your budget, then you can shop for vehicles in that price range.
Lastly, the one factor for which you may not be sure what to input into the calculator is the interest rate. Remember, not all interest rates are created equal. A not-so-competitive rate can end up costing you thousands of dollars by the time your car is paid off. The dealership is only one option of many for financing; don’t forget to check credit unions. Quite often, they offer rates much lower than their competitors.
If you’re anxious to get started, just take the lowest rate your local dealership or credit union is offering currently and add a couple of points to give yourself a ballpark figure. So, if the lowest rate you found was 3%, put 5% in the calculator. But, don’t forget that your rate could be higher or lower than that. Then…happy car shopping!
With so many credit cards choices available today, it's no wonder that consumers don't have the time to decipher the differences in their options. There are even, often times, over five options from one company. So, let's take a minute to talk about some of the things you should consider.
First things first, do you want to pay an annual fee? There is one huge benefit of no annual fee credit cards and that is the ability to maintain credit at no cost. Sounds like a no brainer, right? Well, it's not as simple as "free is better than paying".
Most of us are well aware that a negative credit report or a low credit score can ruin our chances for many of the milestones we want to reach in life; a new car, a college education, a new home, and sometimes even employment.
Creditors look at many things to determine whether or not consumers qualify for credit cards and loans, as well as what interest rate that credit card or loan will be assigned. The criteria includes, of course, how well you manage your credit as well as your debt-to-credit ratio. Both of these criteria require that you have a credit history that the creditor can evaluate. And, often times, no credit is almost as detrimental as poor credit.
So, the biggest benefit of no annual fee credit cards is the ability to maintain credit at no cost. Otherwise, you would be paying, for example, $30 annually just to maintain your card. Another good point to add is that often times, if we pay this annual fee and don't use our credit card often enough, we may feel compelled to close the account to avoid the fee. In actuality, it's recommended that you keep your account open even if you aren't using it. The account being open means you have that credit available to you, thereby improving your debt-to-credit ratio.
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If you’d like to find an estimate of your debt-to-credit ratio, divide your debt used by
your available credit.
Use this as an example:
John has $1250 of debt charged on Credit Card X.
Credit Card X has a $2500 limit.
$1250/$2500=a debt to credit ratio of 50%.
To put it simply, you want, at the very least to have a debt-to-credit ratio of less
than 50%. And some creditors even look for a ratio of 35%!
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With all of that being said, we were always taught to "never say never", right? So, when is it appropriate to pay an annual fee?
If you plan on using your card on a regular basis, paying a lower interest rate is always preferred. Choosing a card with an annual fee and a lower interest rate is preferred if the only alternative is a no-annual fee card with a higher interest rate. Another situation in which you may want to pay an annual fee is when the card with the fee has greater rewards that you would actually use, than a card with lesser rewards or rewards that don't benefit you. For example, if you're a frequent flyer and a card with a fee rewards you with three miles for every dollar spent, but a no-fee card only rewards you with one mile per dollar spent, then obviously paying a small fee is to your benefit.
All-in-all, there are quite a few factors to consider when selecting which credit card is best for you. But, if you evaluate fees, interest rates, rewards, and penalties, you should have of the information you need to pick the card that best fits your lifestyle.
With the right credit card and good usage habits, you can enjoy increased spending power, add another emergency financial resource, reap rewards, and boost your credit score all at the same time!