Stephanie Klein-Davis |The Roanoke Times

Freedom First Credit Union is a 37,000-member credit union based in Roanoke County.

Lesley Martin of Freedom First Credit Union assists Danny and Christine Rippee.

Paul Phillips is chief executive officer of Freedom First Credit Union.

Paul Phillips holds up the original charter when the Freedom First Credit Union was established for $40 in 1956.

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Want a cheaper car loan, credit card or overdraft fee?

How about a better return on your CD?

A credit union will provide those advantages and more, such as tools to handle money wisely, say advocates of these poorly understood financial institutions.

With the economy hanging limp, consumers hunkered down for the recession and banks under fire, credit unions see a chance to boost their puny market share.

Banks and savings institutions dominate the U.S. financial services industry.

They have been the preferred choice of consumers and businesses for years, even though there are about as many credit unions as banks -- about 8,000 each -- in the wake of both industries consolidating.

The obvious underdog, U.S. credit unions posted assets of $882 billion this past summer. Bank of America itself had about twice that. The banking industry is worth more than $13 trillion.

The Roanoke metropolitan area is pro-bank, too, giving banks about 80 percent of deposits in 2008, compared with 20 percent for credit unions, according to SRC, a data company in Orange, Calif. In the New River Valley, banks garner 90 percent and credit unions 10 percent, the data say.

That said, credit unions' nationwide deposits grew at an annualized pace of 25 percent during the first quarter of 2009, cooling down to 6 percent during the second quarter, or about twice that of banks.

Credit union membership growth hit nearly 2 percent this summer, the highest rate since 2004, according to Callahan & Associates, an analytics firm. The population is growing at about half that rate.

"The blow inflicted by the financial crisis and recession to credit unions' formidable large-bank competitors has given them a historic opportunity to win greater popularity among U.S. consumers," said a paper released by the Credit Union Executives Society in Madison, Wis. "Over the last year, credit unions have been able to attract new members away from larger banks as well as grow deposits. They have also enjoyed a greater public awareness of the credit union model, and have demonstrated the stability of their balance sheets and the benefits of conservative lending practices."

How credit unions, banks differ

Why are people shifting to credit unions?

Six Southwest Virginia credit unions that advertise together give this answer: CreditUnionsAreBetter.com.

It's the Web site of a promotional campaign that takes a dig at banks by declaring credit unions stand for "People Over Profit."

The Web report emphasizes that credit unions tend to beat banks on fees and interest rates.

For instance, the National Credit Union Administration reported that U.S. credit unions charged an average of 5.25 percent for a four-year new car loan this past summer, while banks charged an average of 6.62 percent.

Banks offered better rates for mortgage loans. But credit unions did better in all but four of 23 head-to-head rate comparisons in the latest report from Datatrac Inc., dated June 26.

There is consensus about why this is the case. Because credit unions have been given nonprofit financial status by the government, they don't pay federal income taxes as banks do (while they do fork over payroll and real estate taxes).

Operating within a lower cost structure enables credit unions to generally pay depositors more interest, lend for less and ding customers with lower fees.

Not only do credit unions generally operate more leanly, they also differ fundamentally from banks in that they are member-owned. With no shareholders in the picture, the pendulum swings entirely in favor of customers who double as owners.

"There is no fat cat," said Paul Phillips, CEO of Freedom First Credit Union, a 37,000-member credit union based in Roanoke County.

On a regular basis, Phillips said, he and other Freedom First executives ask themselves the following: "What is the least amount that we can charge our members for this service?"

While that might sound bizarre coming from someone who sits in the office of the CEO, wears a suit and oversees tens of millions of dollars, this kind of give-away-the-store thinking is common at credit unions.

An analyst spelled out the difference.

"A bank doesn't work for you. They work for their investors," said Wei Jiang, a senior analyst at SNL Financial in Charlottesville.

"So, they try to give you a low interest rate [on deposits] -- as low as possible -- and try to give you a higher loan rate -- as high as possible. For credit unions, it's a different thing. Most credit unions are nonprofit entities. Their purpose is not to make money ... They work for you. They work for their customers, or members."

He said credit unions aren't more popular because many people don't grasp what they are or fear instability, even though deposits are insured by the National Credit Union Administration, a federal agency similar to the Federal Deposit Insurance Corp. that protects bank deposits. (And, like banks, credit unions are paying mightily to shore it up.)

"One of the issues is awareness," said Mark Wolff, spokesman for the Credit Union National Administration.

Field of membership, origin

Their historical placement inside businesses made them less visible to the average consumer than banks on street corners, he said, and general interest advertising was minimal. In addition, credit unions are not open to the general public.

Instead, would-be members are screened during the application process against a broad list of qualifying criteria.

The site of Roanoke-based FedStar Federal Credit Union explains: "Credit union members have a common bond, such as where they work, live, worship, or go to school. This is known as a field of membership."

In spite of the restrictions, virtually everyone falls into a field of membership, or multiple fields in some cases, and is eligible to join one or more credit unions, advocates said. A Web site, www.creditunion.coop, assists with finding one.

Eligibility requirements are expanding as more credit unions qualify to serve everyone who lives, works or worships in the community where the credit union is based, Wolff said.

Trying a credit union on for size is possible, too.

As a community service, some credit unions offer classes in money management that are free to the public.

Some credit union members say they have learned a lot by going.

Deb Saunders, assistant general manager at Fox 21/27 in Roanoke, went to a class taught by Member One Federal Credit Union in Roanoke. A simple-sounding practice -- writing down what she spent -- opened her eyes to some of her spending habits.

"I was able to really see how much I spent on 'eating out' and was able to put that in a reality aspect and start treating it like a perk instead of a daily routine," Saunders said.

Credit unions began as a source of inexpensive credit for working class people, first in Europe and then in the United States.

Many sprang up within companies specifically to serve employees and, often, their families. By 1937, the federal government passed a federal income tax exemption.

Credit unions have retained the exemption, which saves the industry $1.2 billion to $1.6 billion a year, because of their not-for-profit structure and emphasis on serving people of modest means, according to a 2005 report by the U.S. Government Accountability Office, which acknowledged calls from within the banking industry to level the playing field.

Jetti Montgomery, treasurer of 4,500-member Radford Pipe Shop Employees Federal Credit Union in Radford, said making a profit is the last thing on anybody's mind at his credit union. It's been that way since the place opened in 1937, he said.

The objective and purpose behind a member-owned cooperative is "people together helping each other, not for profit, not for charity, but for service," he said.

That's what makes them a good deal, said Virginia consumer advocate Irene Leech.

"I think there are compelling reasons for consumers to use credit unions instead of big, national banks," Leech said.

"They are often more responsive to needs and, because they are member owned, consumers can/should have a say in what happens."

Members have a say because they elect the people who sit on the board of directors. Directors serve without pay.

Need more proof credit unions are different?

At Freedom First, whose deposits were up 12 percent as of June from a year earlier, deposits are credited the same day they are made. That's instead of waiting till the next day for late-afternoon deposits as some banks do.

It credits direct deposits when the money arrives, even before a member's scheduled pay day.

Members pay no fee to use 50,000 ATMs, four times the 12,000 ATMs unified by the merger of Wachovia and Wells Fargo banks.

When a member's account balance falls too low to cover a debit card purchase, Freedom First tailors the insufficient funds fee to the purchase. It charges $1 if the purchase that drives the account into the red is less than $5. It charges $5 for overdrafts of $5 to $29.99 and $30 after that.

Concerned about the impact of overdraft fees, the Federal Deposit Insurance Corp. did a study and said last year the median insufficient funds service fee at banks and credit unions had risen to $27. It warned that at that level, incurring fees for relatively small charges is the same as borrowing at a quadruple-digit interest rate.

Credit unions say they will help members avoid those kinds of outlays and are doing it in a down economy without any federal bailout cash like that received by banks.

Bankers say not so fast, pointing to the tax break granted back in '37.

"CUs have been the recipients of a government subsidy for decades," Ellis Gutshall, president and chief executive officer of Valley Bank in Roanoke, said in an e-mail interview.

"The annual income tax revenue lost and paid for by the U.S. taxpayer is enormous."

The larger that credit unions have become -- expanding way beyond the convenient, workplace-based organizations the original law envisioned -- the more tax lost, Gutshall noted.

He noted that some credit unions have more than $10 billion in assets. The largest credit union in the nation is Merrifield, Va.-based Navy Federal Credit Union, with 3.3 million members and $39.9 billion in assets. It earned $100.7 million during the three months ending June 30.

What bankers say

Bankers have opposed the competitive advantage given to credit unions for decades, Gutshall said, and also oppose a proposal before Congress to authorize credit unions to lend more of their money to businesses.

That proposal seeks to ease a cap that limits loans to businesses to 12.25 percent of a credit union's assets and replace it with a new cap of about 25 percent.

Not only are many credit unions not equipped for business lending, Gutshall said, the desire to do more of it suggests a profit motive.

"CUs want to get into commercial lending because it is such a profitable line of business," Gutshall said. He said he opposes it.

While some credit unions are huge, some are so small they barely register on modern scales by which financial institutions are judged.

The credit union at High Street Baptist Church in Roanoke posted $1.6 million in assets this past summer.

"You still have credit unions that are just offering basic savings, are helping members with budget and planning, [and] wise use of credit" and lend only small amounts, said Virginia Credit Union League spokesman Lewis Wood.

That said, some credit unions are aggressively modernizing, offering a version of payday lending and marketing themselves on Facebook and Twitter.

The Radford Pipe credit union is looking to upgrade its Web site, expand its service area to the entire city of Radford and change to a more inclusive name that might draw in some students from Radford University, Montgomery said.

Credit unions act more like banks every day, critics say.

Credit unions are a long way from catching up with banks, however.

Jamie Asciolla, marketing director of Freedom First, said the recent joint advertising campaign will expire after few more TV spots running this month and next.

The campaign increased awareness, he said, "but we got a long way to go."