Credit Unions Have Won America’s Hearts. Why Haven’t They Won America’s Wallets?

Americans pay a high price for their credit cards: in 2018, a total of $113 billion in interest and $18 billion in fees, adding up to roughly $1,000 per household in the United States. One reason for those high costs? Americans consistently choose bank-issued credit cards over the credit cards available from their local credit unions.

There are over 5,000 federally-insured credit unions in the United States, with a total of 122 million members. These not-for-profit, member-owned financial institutions generally offer credit cards at a much lower price than their for-profit counterparts. But credit unions only open about 4% of new credit card accounts, underperforming their success in other areas, like auto loans and personal loans, two markets where credit unions have outpaced banks in market share. 

What Credit Unions’ Credit Cards Offer

As of September 2020, credit union credit card interest rates were, on average, 1.26 percentage points lower than the interest rates on bank-issued credit cards: 11.26%, compared to 12.52%.

That may not sound like much, but even a small change in interest rates can translate into big savings for consumers. Of the $820 billion in outstanding credit card balances, 82% are carried over from month-to-month, which means if all credit card interest rates dropped by 1.26 percentage points, Americans would stand to save over $8 billion annually.

If you’re looking for a credit card with an interest rate under 10%, it’s hard to find that from a big bank. As of Friday, the lowest long-term interest rate advertised online by JP Morgan Chase
, the nation’s largest credit card issuer, was 14.24%. By comparison, the nation’s largest federally-chartered credit union, Navy Federal, advertises long-term rates as low as 5.99%. Both JP Morgan Chase and Navy Federal’s long-term interest rates are variable, meaning they will change along with the prime rate, but the quoted rates aren’t “teaser” rates set to expire at the end of a promotional period.

A 2017 study conducted by found that 32 of 38 available credit card offers with interest rates under 10% came from credit unions. 

Fees, generally, are lower at credit unions as well. In 2018, according to a study conducted by CompareCards, credit union-issued credit cards came with an average of 2.7 types of fees each, compared to the bank average of 4.5 types of fees. Credit unions were less than half as likely as banks to charge customers a fee for initiating a balance transfer, or for taking out a cash advance. Nearly all banks and credit unions charge a fee for late payments, but the late fee amount was $14 lower, on average, for credit union-issued credit cards. 

Historically, credit union credit cards had a reputation for not coming with as many perks and rewards as those offered by major banks, but Navy Federal, PenFed Credit Union, and Tropical Financial Credit Union, are among those credit unions who have worked to close the gap. Navy Federal’s Flagship Rewards credit card offers triple points on travel purchases and double points on all other purchases. Justin Zeidman, the head of Navy Federal’s credit card division, said that credit unions who’d like to grow their portfolios need to “focus on what members need and what members want,” citing that during the coronavirus pandemic, Navy Federal added an Amazon Prime
membership as a perk to the Flagship Rewards card, since their members were less likely to make use of the cards’ travel-related benefits. 

Finally, as Curt Long, chief economist at the National Association of Federally-Insured Credit Unions points out, while the big banks have tightened their credit policies significantly in response to the COVID-19 recession, credit unions have been more even-keeled, keeping credit availability relatively constant during the recent economic downturn.

According to data provided by Mintel, in the second quarter of 2020, non-credit-union credit card issuers decreased the amount of pre-approved direct mail they sent by 61% compared to the second quarter of 2019, while credit unions slightly increased the amount of pre-approved solicitations they sent over the same time period. Consumers who found it hard to find good deals from the big banks in 2019 will find that the 2020 marketplace is even tighter. 

Outflanked in Marketing

While a significant proportion of American adults belong to a credit union, America’s largest banks are operating on a different financial scale than credit unions. James Schenck, the CEO of PenFed Credit Union, the nation’s second-largest federally chartered credit union, pointed to the fact that J.P. Morgan Chase records $3.2 trillion in assets, roughly double the size of all credit unions combined. Top players in the credit card industry have the capital to “put a direct mail offer into the right mailboxes not just once, not just twice, but persistently,” said Schenck.

According to Schenck, in a typical year, PenFed spends $10 million or less on credit card marketing, a small amount compared to credit card marketing budgets for banks that can top $1 billion. 

According to data provided by Mintel, in the first half of 2020, credit unions accounted for only 1.7% of the credit card solicitations Americans received in their mailboxes. 

Advertising is especially important in the credit card industry, even relative to other financial products, like home loans, auto loans, and certificates of deposit. According to a survey conducted by Experian, among adults intending to apply for a credit card, 69% of respondents cited uncertainty about their approval odds as a key challenge to choosing a card. 57% said they couldn’t tell what credit card was best for them, and 61% were overwhelmed by the number of options.

All three challenges help explain why a big marketing budget uniquely helps credit card issuers. Sending pre-approved direct mail to prospective credit card applicants is pricey, but it’s one of the few methods that financial institutions can use to reassure consumers about their odds of approval. By comparison, for checking accounts or savings accounts, there’s no need to let a consumer know she’s pre-approved: for these products, credit unions can build awareness through less targeted and less expensive forms of marketing. 

And credit cards are uniquely hard to comparison shop for, especially compared to personal loans and auto loans, two sectors where credit unions have cornered over a quarter of the market. With both personal loans and auto loans, consumers can mostly focus on a single factor, the interest rate, to figure out which loan is best. When the products are simple, splashy advertisements play a less important factor. 

Interest Rates Capped at 18%

A major factor that differentiates banks from credit unions is the fact that federally-chartered credit unions are mandated by law to charge interest rates no higher than 18%. By comparison, most large credit card companies offer products with interest rates in the mid-to-high 20 percent range, while smaller credit card companies—like First Premier, which specializes in serving consumers with low credit scores—sometimes charge interest rates as high as 36%. State-chartered credit unions aren’t subject to the same 18% cap. 

“In the current rate environment, [the interest rate cap] is not a barrier,” said Schenck of PenFed. “17.99% doesn’t limit PenFed or any of the other credit unions right now from reaching out broadly,” adding the PenFed’s credit cards have high approval rates across the credit score spectrum.

But as Curt Long pointed out, the 18 percent rate cap is “potentially constraining” the ability of other credit unions to lend to customers with lower incomes or credit scores. Long pointed to the high volume of credit union loans with interest rates between 15% and 18% as evidence that the restriction may be hampering some credit unions from extending eligibility further. 

According to research in the Quarterly Journal of Economics, it costs financial institutions roughly $37 per year in operating expenses to offer a customer a credit card, on top of an expense called the “cost of funds,” the money banks and credit unions pay to borrow the money that they’ll then lend out. With these costs in mind, a credit card with an 18% interest rate can only break even if fewer than 1 in 3 customers default within the first 2 years. By comparison, the 24.99% interest rate charged, for example, by Citi, would allow them to book customers whose odds of defaulting in the first two years were as high as 1 in 2. 

Not every credit union is interested in doing such risky lending, even if the interest rates are high enough to cover the costs. “Credit unions are conservative by nature,” said Long. “There’s a level of charge offs associated with credit card loans that are beyond other types of lending.”

Limited Membership Criteria

While banks can advertise their credit cards across the country, most credit unions have a limited “field of membership,” meaning that, by law, they need to set limited membership criteria. PenFed Credit Union is one of the few exceptions to this rule. In 2019, PenFed acquired one of the oldest credit unions in the country, Progressive Credit Union. Because Progressive Credit Union was founded in 1918, before the passage of the Federal Credit Union Act, its charter allowed it to be open to everyone. Only two other credit unions have an unlimited field of membership.  

These rules mean that while most Americans are eligible to belong to multiple credit unions — for example, based on where they live, their employer, or their church — finding a credit union to join isn’t as straightforward as finding a bank. Restricting credit unions from expanding their membership criteria has been a major lobbying priority for the American Bankers Association, the most important trade association representing the banking industry.

How To Find The Best Credit Card For You

Most credit card issuers, including banks and larger credit unions, let consumers check online to see which cards they’re pre-approved for without needing to fill out a full application, or having a “hard pull” on their credit report. 

If you’re one of the 48% of American credit card users who always pays their monthly bill in full, you can probably find a great deal from either a bank or a credit union. But if you’re one of the 52% of American credit card users who sometimes or always carries a revolving balance on your credit card, it’s hard to beat the attractive interest rates and low fees that credit unions offer. 

“What happens too many times with credit cards,” said Schenck, “is that they meet the transactional need. If I have a card issued, and I have a credit line available, and I can swipe it, I’m not always thinking about how the card will cost me a fortune over my lifetime.”

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