Today’s Ask Jack question explores the rate environment, and how Members Credit Union sets its rates.

Why when the Federal Reserve has hit historical low lending rate of 1% that the credit union raises their lending rates CAR 6.25% Best vs last months of 6.0% and the unsecured credit line 12.5% vs last months 11.75% it seems they are moving in the wrong direction. I would think at the least to stay pat.”

- Loren W.

To answer this question let’s first start with an explanation of what the Federal Reserve Target Rate (FFTR) is and what it is not. The FFTR is actually not even a rate at all. It’s is a target. The Federal Reserve’s twelve regional banks, after setting aside a mandatory level of deposits, makes overnight or short-term funds available to financial institutions to cover the ebb and flow of daily expenses (and, more importantly to meet mandatory reserve limits). The rate on these loans is determined by market conditions, which the U.S. Federal Reserve manipulates (via the buying/selling of treasuries, adjustment of reserve requirements, etc.) to meet the target rate. These bank-to-bank loans are as close to risk-free as loans can get. This is because these loans are: a) Extremely short-term, often paid back in full within several hours; and b) Extremely small in relationship to the borrower’s (a bank with millions of dollars on deposit) ability to repay.

This distinguishes overnight bank-to-bank borrowing from traditional consumer borrowing quite dramatically. That said, many financial institutions use the FFTR as an index by which they determine certain consumer loan rates. Take the “prime rate”, for example. Many consumers with home equity loans have a rate tied to “prime”. “Prime” is generally three percentage points higher than the FFTR. So, if the FFTR is 1%, “Prime” is typically 4%. If you have a home equity line of credit for “prime plus one,” then your rate is 5%.

Different types of consumer loans, though, are tied to different indices. First mortgage and student loans, for example, are often tied to the behavior of treasury bond yields. Because changes in FFTR do no necessarily affect treasury bond yields, these rates move up and down independently from the FFTR.

A component of the rate we attach to Members Credit Union’s unsecured variable-rate loans is tied to the 2-year Treasury note (T-Note). Each month from March 2008 to June 2008, 2-year T-Note yields actually increased. The good news is that since then, we have seen a marked decrease in that index. We expect this trend to continue, which will mean a likely rate reduction on unsecured variable rate loans when they are next adjusted January 1, 2009.

Secured, fixed-rate loans such as automobile loans are set by our rate committee based on market factors such as competitor rates, member demand, and our balance sheet. Historically, we have maintained extremely competitive rates. For example, the national average 60-month new automobile loan rate is currently 7.19%, while the national average used automobile rate is 7.67%. Our current rate of 6.00% on both new and used automobile loans (with 20% down and automatic payments through an MCU account) compares quite favorably to these figures, especially when you consider that the above national average rates assume a minimum credit score of 700.

Members Credit Union returns earnings to members in the form of lower loan rates, higher deposit returns, fewer and lower fees, and improved service offerings. This philosophy has mandated that our rate sheet gives members the best possible prices on loans and deposit products we can possibly offer. We spend a great amount of time and energy creating this scenario for members, and I couldn’t be happier with the results. Across the board, we are confident that our rates and fee schedule, combined with our branch footprint and service offerings, are the best deal possible for members.

I recently received two questions with a similar theme:

My 403 b is losing money. i am putting in the max. amount right now w/ employer matching. am i better off leaving this alone or should i not put in the minimum and put the rest in cd’s? does the match make up more than the loss incurred by the deprived economy? it is time to recommit for next years benefits and i ‘m not sure the best route to take. thanks! 
- Joel

My question has to do with 401k employer plans. With the current financial crisis the balance continues to drop. Some have taken the money out ‘for the time being’ until things calm down, others are riding out the storm. If the worst occurs, and your balance goes to $0 ‘on paper’ , do you still own the ’stock’ that the funds were invested in? And do you just wait and hope the ‘value’ of the stocks come back and grow in value again? Or would it be wise to take the money out and then re-invest at a later date when markets calm down? I am 50 years old and have only been in my current employers 401K for 2 years.
- Paul

Current economic conditions have dealt many, if not all, Americans serious losses in their investment portfolios. While Paul is correct in saying that much of these losses are only “on paper,” this is of little consolation to investors who are nearing or in retirement. The key considerations here are risk tolerance and investment expectations. Are you the type of person who wants huge returns and are willing to stomach the risk associated with that type of investment? Are you someone who wants to see smaller, but more predictable gains – following the slow and steady wins the race mindset? Are you somewhere in the middle of these two categories?

At Members Credit Union, we partner with MEMBERS Financial Services to provide investment services and advice to our members. I encourage all of you to give Richard Davis a call at 800-951-8000, x111. He would be more than happy to help you evaluate your own risk tolerance, and guide you through the investment process.

One investment that I absolutely know is wise is the employer match portion of your 403(b) or 401(k) plan. Even if you are totally adverse to risk, there are typically investments under these plans that are safe, fixed income options to offset your fears. Regardless of their actual returns, an employer match is a 100% investment right out of the box. It typically pretty wise to at least put enough aside in these plans to take advantage of the employer match.

Certificate investments are always a good idea because they provide a fixed return over a set period of time. While this is a conservative option, certificates (especially those at Members Credit Union) can provide a very high return. For this reason many people choose to make certificate investments a prominent part of their portfolios. Your personal investment style should dictate what percentage of your investment activity should be allocated to this kind of option.

Lastly, to address the individual stock question, I want to point out what mutual funds are and what they are not. Mutual funds managers invest in individual stocks, bonds, and other investments to create as predictable of an investment option possible. The percentage each of these funds allocates to various investment vehicles dictates the risk levels of these investments. A good manager diversifies these funds in such a manner that if a portion of the funds’ investments lose money, there are other investments within those funds that offset or counteract those declines. So, even if a fund invests in a stock (to follow Paul’s example) whose value drops to zero, the likelihood of the entire fund dropping to zero is almost 0%.

The key is to not panic – as hard as that may be. I don’t know what will happen with the market. Anyone who tells you that they do is lying. What I do know is that panic makes people sell low and buy high. That is the opposite of what conventional wisdom dictates.

Thank you for your questions, and make sure you call Richard Davis at MEMBERS Financial Services for a free consultation – another free service brought to you by your friends at Members Credit Union.

William,

Thank you for your question! Transparency in our decision-making is extremely important to Members Credit Union. We appreciate this opportunity to display that principle.

We offer separate cards to make sure that all members, no matter what their account relationship with us may be, have as much access to their funds as possible in the most cost effective way possible for the credit union. Our current, three-card lineup provides the perfect balance between convenience, cost effectiveness, and consumer protection.

The VISA Credit Card allows members to access an MCU unsecured line of credit. The MCU Cash Card provides members who do not have a checking account to access their funds fee-free up to two times per month from ATMs. The Cash Card also provides access to your checking account with PIN-based (”debit”) transactions at retailers and ATMs. The VISA Debit Card allows an unlimited number of fee-free ATM transactions AND unlimited fee-free purchase transactions. ATM withdrawals are PIN-based transactions, while purchases are signature-based (”credit”) transactions. The VISA Debit Card is only available to members who have MCU checking accounts. MCU members with checking accounts can do everything with their VISA Debit Card that SECU members can with their card with the exception of the “cash back” option in check-out lanes. Only members who find the “cash back” option necessary will need to carry two cards.

The long answer is this:

Members Credit Union offers three different plastic account access cards: a VISA Credit Card, an MCU Cash Card, and a VISA Debit Card. These all have their unique uses, which I will now explain:

Our VISA Credit Card is exactly what it sounds like. It allows members access to an unsecured credit line anywhere VISA is accepted. When the card is used for a purchase, the balance on the associated account increases. This, likewise, increases the minimum payment and interest charges for which you are responsible to repay. This is a signature-based card, meaning that when it is used you must select the “credit” option at the point-of-sale (cash register, terminal, etc.). 

I explained much of the usage differences between the VISA Debit Card and the MCU Cash Card on my post “Cars, Cards, and Laundry Detergent,” but let me describe the differences in an alternate way here:

The MCU Cash Card is a PIN-based card. This means that you must enter a PIN for Cash Card transactions to process. This card was intended to give ATM access to members without a checking account (and, thus, do not have a VISA Debit Card). Members can used these cards at thousands of surcharge free ATMs across the state at no charge up to twice monthly. There will be a $1.50 charge for each additional transaction to help offset the credit union’s cost of this service.

For members with an MCU checking account, the MCU Cash Card can be used fee-free for point-of-sale purchases. Remember: you must use the “debit” selection and enter your PIN, as this is a PIN-based transaction. Members are subject to daily, cumulative transaction limits, however. Please check with your nearest MCU representative for more on that. Because the MCU Cash Card can also access your checking account, some members use this card at a point-of-sale to take advantage of the option to get cash back from the transaction. This is only available with our Cash Card and the “debit” selection.

Our VISA Debit Card is available for members with MCU checking accounts. This card provides members with unlimited fee-free ATM transactions from surcharge free ATMs. Our debit card is PIN-based when used at ATMs, and signature-based when used at point-of-sale locations. This means that when you use your card at an ATM, you will be required to enter your 4-digit PIN to complete the transaction. When you use your debit card at a point-of-sale, you will need to select the “credit” option at the terminal.

There are two very important reasons our debit card is used in this way: 1) Signature-based transactions on the VISA network provide consumers with what are called “chargeback rights”. Chargeback rights essentially give you the ability to appeal, through Visa, for a reversal of any charge if it meets certain criteria. This ability to dispute charges, with the backing and power of Visa, gives members comforting consumer protection that is unavailable with PIN-based transactions. 2) Each signature-based transaction provides Members Credit Union with a small revenue source called interchange. Interchange is paid by the retailer to cover the costs of providing the transaction approval technology behind each card acceptance. This income, though not paid directly by members, allows our credit union to keep member loan rates low, deposit rates high, and our fee schedule as member-friendly as possible.

Members Credit Union has a big announcement to make! Today we are launching our own economic stimulus package for our members – one we call the Holiday Skip-a-Pay Program.

When times get tough for our members, we notice…because we’re members too. So, this November and December, we are going to allow members to delay their loan payment by a full month. This includes all non-mortgage-related loans.

There is no fee whatsoever attached to this program. We will simply change the due date on your next loan payment and extend your loan term by one month. Just a helping hand to help you during this turbulent economic time.

We want to make sure your holiday season is filled with family, friends, and joy – not financial worry. So, if this program will help your family out, simply call your nearest branch manager to get started. You may also contact our main office at 1-800-951-LOAN or “loans at memcu dot com”.

We have been proving the credit union difference since we opened our doors in 1953. This program highlights, yet again, why your Members Credit Union membership is so special. Thank you for your continued membership and support – and make sure you tell your friends and family that Members Credit Union looks out for its members.

Members Credit Union’s marketing department has developed an extremely simplified view of what led to the current credit crisis. Obviously omitted were discussions of the derivatives market, insurance programs, and specific investment practices. This was intentional. While we realize that these were factors that exacerbated the problem, it was imperative for us to get to the root of the credit crisis: sub-prime lending. This presentation was heavily inspired by NPR’s This American Life, which we definitely recommend.

This presentation has been performed for various employers and members of Members Credit Union, and is available for free in DVD form (quantities limited). If you are interested, send me a message. Otherwise, please enjoy the following video and share with anyone you wish: