Ali Letterman Banking Guide

Banks or Credit Unions – Where is Consumer Money the Safest?

The economic recession has led to some interesting questions and results in the financial industry. One of the questions that has arisen concerns whether a bank or a credit union is the safest place for your money. The question has come back because consumers lost trillions of dollar during the recession due to falling investment portfolio values. Though FDIC insured bank deposits are safe, the very fact banks have failed has raised concerns about money safety.

In other words, consumers don’t want to lose any more than they already have during the recession. The question was addressed again when Bauer Financial gave 5-star safety ratings to Telco Credit Union in Birmingham, Alabama for the third quarter of 2009. Bauer is a research firm that is based in Florida.

In fact there were 18 credit unions with Birmingham branches that received this top-of-the- line rating. It is one that recipient credit unions can be proud of because it means they have not only survived the recession but they are going strong. Telco saw deposits grow by $70 million in 2009.

In comparison, only one Birmingham bank received a 5-star rating – Central State Bank.

Bankrate.com has also been giving 5-star ratings, though not the same ones as Bauer, and not as many either. In fact Bankrate.com gave only one 5-star rating to Birmingham banks.. The O’Neal Credit Union was honored with Bankrate.com’s highest honor.

Credit unions are reporting that they are getting customers transferring their accounts from banks. Many credit unions are performing better than banks, and that leads to the question posed in the beginning. Is money safer in a credit union or bank? The answer as usual is: it depends on which financial institutions you are talking about.

One of the reasons so many credit unions are expanding even as banks contract is due to the fact they have stricter consumer credit eligibility requirements for issuing debt. In other words, the credit unions didn’t make as many bad loans as banks did, and as a result they have experienced fewer loan losses. Over half of the Alabama credit unions received 4 or more stars from various rating groups.

These high ratings are attracting more and more consumers who would normally seek loans from banks. Credit unions tend to serve customers in a geographical area and that minimizes their risk too. In Alabama, delinquent loans account for only 1.05 percent of total loans at credit unions and 2.05 percent at banks.

A caution to consumers must be made though. Not all credit unions are performing as well. There are credit unions receiving low ratings also. In fact there were two Alabama credit unions that were seized by federal regulators in 2009 in Birmingham and there were others around the nation.

Though this has not been proven, it would probably be safe to say that many people choose their bank or credit union based on location or connection to where they work. Many credit unions are tied to a particular place of business and get most of their members from that company. Unfortunately, as was seen during the recession, when the business shuts down the credit union is faced with rising loan losses.

Perhaps this is why it is always recommended that consumers spread their money around a bit. Perhaps the wise decision is to put some money in a credit union and some in a bank. That will serve as a hedge against the unknown and there have been plenty unknowns over the last year and a half.