Socialize your money and join a credit union

The Thinker by Rodin

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.

Real Life 101, Lesson 8: Avoiding the Credit Trap

The Thinker by Rodin

This is the eighth in an indeterminate series of entries that provides my “real world” lessons to young adults. It is my conviction that these lessons are rarely taught either at home or in the schools. For those who did not get them growing up you can get them from me for free. This is part of my way of giving back to the universe on the occasion of my 50th birthday.

It has been a while since I wrote an entry in this series. Yesterday’s huge jump in oil prices, combined with a .4% increase in the unemployment rate in one month, along with a stock market which dropped precipitously (the DJIA dropped nearly 400 points) made me think about one of the major reasons the economy is tanking. It can be summed up in one word: debt.

In Lesson 2 of this series, I did discuss debt in general. Today I would like to focus on one kind of debt in particular: credit card debt. The Federal Reserve keeps a handy report on consumer debt, all neatly categorized. As of June 2008, total credit card debt is just shy of one trillion dollars: 956.9 billion dollars, or roughly $3200 for every man, woman and child in the country. In 2003, unsecured “revolving” (i.e. credit card) debt was 770.5 billion dollars. Perhaps more ominous is the rate of increase in unsecured credit card debt: 2.9 percent in 2003 and 7.4 percent in 2007. Americans are living way beyond their means and they are funding their lifestyle in the worst possible way: by charging it.

Why is “charging it” worse than other forms of debt? It is because credit card debt is unsecured, which means that you do not have to pledge collateral like your car or house to buy things today. This makes credit card debt riskier for lenders. They compensate by charging interest on your credit card debt that is often two or three times as much for an equivalent amount of money in a conventional loan. This also makes credit card debt potentially more profitable than other forms of debt. Hence, you are likely solicited with many credit card offers a week, many seducing you with frequent flier miles or low introductory interest rates.

Young people in particular are easy prey for this kind of debt. Just starting out, you do not tend to have much if anything in the way of assets. A credit card allows you to buy stuff today and pay it off later when you have more income. All you have to do is meet that “minimum monthly payment”. The problem of course is that young people tend to see money as abstract rather than real. What matters becomes not your credit card balance, but whether you can meet your monthly payment.

Charge card companies love providing you credit because of the interest and fees they get to charge you on the balance. Those teaser rates look great but credit card agreements are fungible and can be changed with minimal notice. Typically, interest rates go up after six months or so, along with all sorts of bogus fees. Often the time between when you receive your credit card statement and when you must pay your bill is squeezed, making it more likely that you will pay other fees for “late” payments. Providing you can keep making those monthly payments, credit card companies are likely to keep increasing your charge card limits, thus encouraging you to exacerbate your indebtedness to them. In short, as you probably have read, unsecured credit for many can eventually become something of an albatross. Like a Ponzi scheme, at some point the burden of your debt will crush you and your future. Instead of paying for life’s necessities like food, you are primarily paying the interest on your outstanding balance. This means life’s other necessities get short shrift. You may think a bankruptcy can bail you out. However, some years back Congress tightened the bankruptcy laws. No bankruptcy is good and bankruptcies, if you can secure one, cost money too. It stains your credit, making it harder to borrow money in the future for life’s major purchases, like houses. It is also bad for creditors, who lose money.

Like you, I probably get three or four credit card solicitations a week. How many credit cards do I have? I have exactly two. In reality, I have one. Recently I got a Sears credit card, specifically because I saved $100 off the cost of a dishwasher by enrolling. I do not intend to use it again. I did not pay a dime in interest when my bill arrived because I had set money aside to pay for it in full.

In reality, I have only one credit card: a humble Visa card issued by my credit union. My credit union offers no rewards program. I get no frequent flier miles for charging expenses on it. It does have one major advantage. Because I am a member of my credit union, as opposed to a customer, I am unlikely to get screwed by my credit union. My interest rates are likely to be better than most credit cards. The terms of service will not change very often. Moreover, my grace period will stay relatively static. In short, I get predictability and credit card value.

What balance do I carry on my credit card? Every month I get a statement that says I have a balance of a few hundred dollars. What is my real balance? Zero. How much have I paid in fees and interest rate charges in the years I have had my credit card? Zero. How is this magic possible? It is possible because while I have credit I pay off my balance every month. As soon as I make an expenditure on my credit card, I debit it from the checkbook I will use to pay off the charge. This way there is never any ambiguity about whether I can afford to buy something. I simply look at my checking account. Is there enough money in there to pay all my other expenses? If not, this is my signal that I cannot afford this purchase. Is it fun to deny myself stuff today? Not particularly. Does my strategy have any advantages? Of course. Rather than paying hundreds or thousands of dollars in interest and fees a year, I get to pocket the money and use it for something that actually gives me something tangible in return. Nor do I wake up in sweats in the middle of the night worrying about my debt load.

I make a credit card work for me, instead of against me. A credit card can work for you when it can give you advantages that check cards and cash cannot. When I use a credit card, I get a certain amount of financial protection. Should the seller be bogus, I can get a refund, or I am out no more than $50. I always use a charge card for purchases like airline tickets. Who knows whether an airline will be around in 90 days? If you have the fortitude to pay off your balance every month, you also essentially get free access to money for a period.

Have I paid interest on my charge cards? Yes, but only tiny amounts over the years when I messed something up or when I was just establishing credit. I started with a humble Montgomery Ward charge card and I paid less than my balance for a few months. This encouraged Wards to up my credit limit and established my credit worthiness. Then I stopped this tactic. As a result, when I do need to borrow money, I tend to get the lowest rates. Lenders know based on my track record that I will not miss a payment.

I encourage you to not be owned by your credit card, but to have it work for you too. I suggest you try my strategies. If you are one of these types who will be compelled to spend if you have a credit card, it is better to avoid them altogether and use check cards instead. Granted, it is not always fun to live within your means. Nevertheless, you should feel in control of your financial life, and that is a wonderful feeling. If you must make larger purchases, do not use a credit card. Take out a personal loan, preferably with a financial institution where you already have a history. If you have equity in your house consider taking out a home equity loan. Be cautious taking out any loan. You might want to review Lesson 2 of this series if you are trying to distinguish whether a particular loan helps or hurts you.

America is drowning in debt. It is not just young adults, but millions of Americans are living beyond their means. It is also our government, which is exacerbating the problem by using foreign credit to get us to spend more money now to spend our way out of a recession. This is like a drunk drinking their way to sobriety. It makes little sense until we all start to use debt responsibly. Much of the increase in the price of oil is due to our falling dollar, which falls because our government is spending too much and likely taxing too little. The more in debt we incur, and in particular the more we go into debt for things that add no value, like our War in Iraq, the worse the recession and our pain will be.

Do not be a financial loser, like most Americans. Vow to be a financial winner. To start, you must know where your money goes, how much you can really afford and you must use debt responsibly.