Paying off credit cards can save you big money long term. (Photo Credit: CC BY-ND/lemonjenny/Flickr)

A certificate of deposit is traditionally a worthwhile, low-risk investment. However, CD rates have been so low lately that many consumers have moved their money into more productive financial ventures, reports Bankrate. Paying down debt – particularly credit card debt – has taken center stage.

One-year CD rates scraping the bottom

According to Bankrate, the current average for one-year CD rates is a miniscule 0.44 percent. The highest surveyed was 1.31 percent. Considering that credit cards typically carry an APR of 20 percent or more, a paydown is attractive. U.S. consumer credit card debt still exceeds $790 billion, despite significant shrinkage since 2004, reports the Federal Reserve. That explains why CD balances have fallen to a six-year low of $839.2 billion.

This isn’t a new phenomenon. Market Rates Insight notes that such a shift was apparent in September 2010. From Jan. 1, 2010, to June 30 of the same year, the average monthly CD amount declined by about $3 million. Of the amount that was not rolled over, surveys indicate at least 15 percent was used to pay down credit cards. The rest went into liquid accounts like checking, savings and money markets.

Demand for liquid accounts is high

The Credit Union National Association’s June Credit Union Trends Report found that highly liquid accounts are desirable to consumers looking to eliminate debt. Regular share accounts, money markets and share draft accounts have all seen greater activity since April 2010: a 128-percent total savings increase. The $834 billion in total savings reflected a $35 billion (4.4 percent) increase since April 2010, writes Credit Union Times. CDs dropped 5.2 percent over the same period. These results are consistently below historical trends and suggest that the U.S. is still firmly in the grip of economic uncertainty.

Dave Colby, the chief economist at Credit Union National Association Mutual in Madison, Wis., sees the writing on the wall.

“From a member perspective, households are rational and will continue to pay down higher-cost debt obligations versus building savings, which are losing ground to inflation,” he said.

Savings vs. debt: Weighing the pros and cons

Sources

Bankrate

Credit Union Times

Credit union trends report (PDF)

Money Rates

Visit America's Credit Unions website to find a credit union near you. (Photo Credit: CC BY/John Benson/Flickr)

One of the most important decisions consumers can make regarding their money is where to keep it. Banks are a common option, but those who have tried depositor-owned credit unions will argue that the advantages over banks make them quite worthwhile. Here are a few of the advantages of choosing a credit union versus a bank.

Shareholder versus depositor interest

While large commercial banks are the domain of corporate shareholders – and hence most concerned with generating profits for a small, select group – credit unions belong to the members. Volunteer customers even serve on each credit union’s board of directors. The sense of shared ownership is reflected in the name credit unions give to checking accounts: share draft accounts.

Interest rates on loans are generally lower at credit unions than banks, and the rate of return on deposits can be significantly higher, particularly on CDs. A credit union’s responsibility to its depositors is highly desirable for the average banking customer.

Smaller size, better individual care

Considering that credit unions are smaller than most banks and generally have fewer overall customers, the opportunity for greater individual care from a financial professional exists. The tradeoff here is that ATM networks may be smaller with credit unions, and the list of services provided will be slightly abbreviated when compared with those of a large bank.

NCUA stability

The banking crisis has caused many smaller banks to go under. Larger banks have depended upon federal bailout money and taxed the reserves of the Federal Deposit Insurance Corp. to the limit. Credit union deposits are insured against loss by the National Credit Union Administration, and the number comparison is telling, reports Bankrate. From the beginnings of the financial crisis through May 2011, 44 FDIC-insured banks failed, versus only nine NCUA-insured credit unions. This disparity exists largely because banks made more risky loans in their drive to boost shareholder profits.

Payday loans at a credit union near you

Recent programs instituted by the NCUA, such as Better Solutions, have enabled credit unions to offer payday loans and similar short term loans to customers at annual interest rates that top out at about 28 percent. A 30-day repayment period is required, and the number of loans a customer can take within a six-month period is limited to three.

Banks versus credit unions

Sources

America’s Credit Unions

Bankrate.com

MonitorBankRates.com

Many credit unions are now offering payday loans. Image: informatique/Flickr/CC BY-SA

Credit Unions, which are generally considered more trustworthy than traditional banks, are more and more frequently offering short term loans that rival payday loans in many aspects. This change comes in response to new federal guidelines. Many analysts find this trend disturbing, while others see it as offering credit union members more options.

Many find credit unions appealing

Credit unions are cooperative financial institutions that are owned and controlled by members. By dispensing prudent loans without the profit motive of traditional banks, they are becoming more and more attractive to jaded consumers. Many say they are fed up with the hidden charges and impersonal customer service they receive from regular banks. However, when it comes to immediate short-term financial needs, credit union members have often had to to look elsewhere.

That is changing rapidly as more and more credit unions are offering low-cost, short-term loans with higher interest rates.

Federal rate cap increase

The National Credit Union Administration, in a voluntary program called Better Solutions, offers a package of services and products for participating credit unions. In September 2010, the NCUA changed its rules for short-term loans, raising the annual interest rate cap from 18 to 28 percent. Under these new guidelines, a credit union must allow borrowers at least 30 days to repay a short-term loan and not to allow more than three per customer in a six-month period.

A less predatory option?

More than 500 federally insured credit unions are offering these kinds of loans. Industry advocates say they are offering their customers alternatives to more predatory lenders on the market. “We spent a long time trying to do this in a way that would work for members and for the credit unions and not be predatory,” said Debbie Matz, chairman of the NCUA.

Detractors ascribe profit motives

Detractors, however, ascribe much less altruistic motives to the loans. Some say it is just a way to generate more revenue for an industry that suffered greatly in the financial crisis of 2008-2009.

Credit unions, which operate as nonprofit groups, aren’t allowed to raise investor capital like traditional banks can in times of trouble. According to the NCUA, about 4,600 credit unions — or about 7 percent of the industry — are at a high risk to fail.

Linda Hamilton, a consumer activist in Salt Lake City, says “they are promoting these loans as payday alternatives, but they are not really alternatives.” Hamilton, who is opposed to payday loans, sees these credit union sponsored loans as little more than the same thing.

Guidelines are voluntary

Because the new NCUA guidelines are strictly voluntary, many credit unions sell loans at higher rates than the federal program suggests. The Mountain America Federal Credit Union in Utah, for example, offers a five-day $100 loan it calls “MyInstaCash.” The loan costs $12, a 876 percent annual interest rate.

Be informed

Karen Datko of MSN Money says that these credit union payday loans aren’t necessarily good or bad. “It really pays to be an informed consumer before you apply for one,” she advises.

Sources

Paydayloan.net
Washington Post
MSN