By Jill Everton | Published: January 13, 2019
Credit unions are often the best banking and credit solution for low- to moderate-income families. Lower interest rates on lines of credit and higher earning potential for savings accounts make local credit unions an attractive option for many, but minorities in many communities can find even more value from working with a local credit union.
Credit options for minority communities
A credit union is a member-owned, non-profit financial institution where members can deposit money, take out loans, and open a new credit card. Twenty-eighteen has been the fastest growing year for credit unions since 1986, in part because of the value they can offer niche community groups and minorities.
Credit unions have the ability to cater to the specific needs of their communities, specifically low-income earners and minority groups. According to the National Credit Union Association, “minority-owned and managed credit unions play a critical role in providing financial services to communities that have been traditionally underserved or unbanked.”
By using a minority credit union, one can support a local business while getting services that address specific pain points that affect a certain audience or community.
Another banking option, minority depository institutions (MDIs) are often small community banks associated with an ethnic minority group. These institutions usually provide services to specifically benefit the minority community in which they serve.
While it may seem that these institutions, whether credit unions or MDIs, cater only to a specific minority population, they aim to serve any person, regardless of race or ethnicity. There are some great benefits to joining one of these banking options in your community, although you should consider all of your options before making a decision.
Community benefits of minority credit unions
Some advantages to using a minority-owned bank or credit union include reinvesting in your community and helping underserved members of your community build assets and credit, manage debt and build generational wealth. Doing this not only benefits those individuals and their families but adds value and stability to your entire neighborhood.
African American Credit Unions, for example, serve some of the most vulnerable communities in the U.S.
According to the 2017 FDIC Household Survey, “recent declines in unbanked rates have been particularly sharp for younger households, black households, and Hispanic households.” When banks don’t fit the bill, communities have taken initiative and created their own solutions, including minority-owned banks and credit unions.
The advantages and disadvantages of minority credit unions
Inclusiv.org states that credit unions are “the best choice for low-and-moderate-income earners. [Minority] credit unions help their members build assets and credit, manage debt, and lay the foundations for building generational wealth.”
While it’s no secret that minority-owned credit unions can offer benefits that larger banks or financial institutions cannot, they aren’t always the best fit for an individual’s needs. In some cases, a national or international bank may make more sense for you; it’s important to weigh the advantages and disadvantages in order to make the best decision for you and your family.
- Credit unions often offer more favorable terms: higher interest rates on savings accounts, lower minimum deposits, lower annual fees, lower APRs on credit cards and loans, and more.
- They offer payday alternative loans. PALs allow members of some credit unions to borrow small amounts of money at a lower cost than traditional payday loans and allow you to repay them over a longer period.
- They cater to your specific community. These are local people from a local institution that are serving your community specifically, not areas throughout the entire country. It is personal and personalized to you and for you.
- You’re supporting your community. Utilizing these minority credit unions serves your community. Help these institutions become more mainstream for your neighborhood.
- Your accounts are tied together. In a process called cross-collateralization, a credit union may link your financial products. For example, although you may not know it, your credit card may be tied to your checking account, meaning that if you default on the card, in theory, the credit union can pull the funds from your checking account. They can do this if they believe you will default, even before your payments are due.
- Credit unions may want a little more from you and may hold you to more obligations than a larger bank. If you don’t have excellent credit, you may be asked to take financial education or money management classes, which a traditional bank likely wouldn’t do.
- Credit unions are vulnerable to market swings. Because credit unions are local financial institutions, a severe economic downturn could damage the credit union. (However, even if your credit union falls on hard times, members are protected for up to $250,000 by the National Credit Union Administration.)
- Credit unions are limited by area. Credit unions serve specific areas and neighborhoods, and they rarely make up large chains. If you travel often or plan on moving communities in the near future, a local credit union may not be the best option.
- Credit union credit cards are not likely to have the rewards of major rewards credit cards. It may be possible to find a credit union card with a sign-up bonus, as in the case of the PenFed Gold Visa $100 bonus after spending $1,500 in three months, but ongoing rewards may be hard to find. An alternative would be to use a zero interest credit card.
If you do decide that a local credit union is the best option for you, make sure to research what is available in your area. Here is a list of minority-owned credit unions in the U.S. to help jumpstart your search.