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Little credit unions are a viable alternative to big banks

Member-owned institutions can provide better rates although services may be limited.

February 07, 2010|Liz Pulliam Weston | Money Talk

Dear Liz: I want to stop supporting the greedy banking industry by changing my checking account from a big bank to my local credit union. But I'm worried I will have to give up services I like, such as online banking and free bill payment. What will I give up if I use a credit union?

Answer: You may not have to give up anything, and you may gain a few things, depending on how you bank.

Credit unions are member-owned, which means they don't have to worry about making profits for shareholders. That translates into better interest rates and lower fees than banks. Many people discover credit unions when they're looking for auto financing or personal loans, drawn by credit unions' typically lower rates compared with those charged by banks.

Credit unions: The Money Talk column in Sunday's Business section about the benefits and drawbacks of credit unions gave an incorrect address for a website where people can search for a credit union to join. The correct address is —

You may find banking with credit unions cheaper in other ways. Most have very low minimum balance requirements for free checking and savings accounts. Many credit unions are also members of the Co-Op Network, which offers fee-free access to more than 28,000 ATMs nationwide, far more than any bank.

That doesn't mean they're right for everyone. While most credit unions offer online banking and free bill payment services, for example, their other services may vary. Some offer real estate loans, for example, while others don't.

Before you switch, you'd be smart to review your transactions over the past few months and think about what loans or services you're likely to need in the future. Make a list and ask your credit union what it provides and what fees it charges.

If you decide to move, open your new accounts first and set up online access so you can monitor your transactions. Then move any direct deposits you have, such as your paychecks. Change any automatic debits and recurring payments so they come out of your new account. Keep open your old accounts until all payments have cleared, then shut those down.

To find a credit union you can join, visit

Keep track of grace periods

Dear Liz: If I'm given a 10-day grace period for making a payment and pay the bill on the last day of the grace period, will it still be treated as an on-time payment on my credit reports?

Answer: Typically, yes. In fact, most creditors won't report you to the credit bureaus as overdue until your payment is 30 days or more overdue.

That's not to say you should treat due dates casually. Missing the due date (or the end of the grace period, if that's different) will typically trigger a late fee and could lead to higher interest rates.

You would be smart to make sure your payment reaches your creditor a day or two before the end of the grace period. Using electronic payments rather than the mail can help you time your transactions more precisely. Online or automatic payments also leave an electronic trail that can prove when you paid.

Don't raid 401(k) to pay off debt

Dear Liz: I have almost $250,000 in my retirement accounts. I also have almost $50,000 in credit card debt. Should I take $50,000 from my 401(k) to pay off the debt?

Answer: No, no, no.

In case that wasn't clear: No.

Of all the dumb financial moves you can make, raiding retirement funds to pay off credit card debt ranks near the top. You'll pay penalties and taxes that typically equal one-quarter to one-half of any withdrawal, plus you lose the future tax-deferred returns that money could make. If you're 30 years from retirement, that $50,000 withdrawal would cost you $500,000 in lost retirement income, assuming an 8% average annual return.

The fact that you have that much debt puts you at high risk of bankruptcy. In bankruptcy, your unsecured debt can be wiped out or reduced, while your retirement funds would be protected from creditors.

If you can't figure a way to pay off your debt without raiding your retirement, you need to make two appointments: one with a legitimate credit counselor (visit the National Foundation for Credit Counseling at and another with a bankruptcy attorney.

Liz Pulliam Weston is the author of the book "Your Credit Score: Your Money and What's at Stake." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the "Contact Liz" form at Distributed by No More Red Inc.

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