How to find a small bank or credit union

When we wrote about sneaky bank practices, a lot of readers wrote in suggesting that fee-weary customers ditch the big bailout-recipient banks in favor of small community banks or credit unions. In fact, many professional personal finance advisers say exactly the same thing, so WalletPop talked to a few of them to get their recommendations and advice for how to go about finding one of these friendlier financial institutions.

First, you'll need to find a place. While finding a bank can be as easy as driving down your local main street or commercial district, finding a credit union can take a little more sleuthing. Since credit unions are membership organizations, you need to find out which ones you are eligible to join, says David Beck, director of policy at Center for Community Self Help, an organization which includes the Self Help Credit Union and the Center for Responsible Lending.

In many cases, this may be as simple as living or working in an area that is home to a particular credit union, but being a current or former member of the military, many trade unions, religious communities and educational institutions may also qualify you for credit union membership.

There is a database of credit unions in the U.S. that will give you a good starting point for your investigation at the website of Credit Union National Association, CUNA.org. The big difference between the two types of institutions is that credit unions are nonprofit.

"I think a partnership model is better than a corporate profit model when you're selling a service," advises Kathleen Day, spokesperson at the Center for Responsible Lending. Of course, a nonprofit can be mismanaged just like a corporation can, but a business model mandating that profits be funneled back into the enterprise is, for many consumers, a big selling point.

So far, 123 banks have failed this year, and the one big down side of small banks is they're not in that "too big to fail" category. So you want to make sure that the new home you choose for your hard-earned dollars is in good financial health.

The FDIC monitors bank health (after all, they don't want to be caught unawares when one of them goes bankrupt). Go to FDIC.gov for information about a specific bank. The CUNA website offers similar details about the credit unions that are part of the association. Of course, as long as you don't have more than a quarter of a million dollars per account, your money is protected by FDIC insurance (National Credit Union Share Insurance in the case of credit unions), but it's certainly preferable to avoid the hassle of having to reclaim your money after an institution fails.

In the case of smaller banks or credit unions, word of mouth can still be a reliable way to find one, too. "In the case of a local bank, you want to have your ear to the ground locally," says Linda Sherry, director of national priorities at watchdog group Consumer Action. "For instance, has the same family owned it for years? Do you know anyone who banks there? Who's on the board?" Generally, it's a good sign if the institution has been owned and managed by the same people for a number of years.

Once you've settled on a bank or credit union that looks like a contender, visit its website as well as a branch to get more information. If you use online banking at all to pay bills, make transfers or otherwise manage your money, the website should be the first place you check out, says Self Help's David Beck. Smaller institutions often don't have all the online banking bells and whistles of the big boys, so if you conduct most (or all!) of your banking in front of a computer screen, make sure to pick an institution that has a site robust enough for your needs.

Next, find out how many branches and ATMs they have and if those machines are in areas convenient to your home, work, school or commute. If you have to go out of your way to get cash, you could fall back on using another institution's ATMs and get socked with fees, points out Consumer Action's Linda Sherry. Even if the small bank doesn't charge you to use another bank's machine, that other bank probably will, and you're switching banks to get away from those nickel-and-dime fees, right?

Ask for a schedule of fees and read through it, Sherry advises. Will you be charged a monthly fee for a checking account? Will you be charged a fee if your account balance drops below a certain threshold? Will you be automatically enrolled in an overdraft "protection" program? If so, how do you opt out? What's the fee if you overdraw your account at an ATM, using your debit card for purchases, and when writing a check? Can you get cash advances if you need one? What's the charge for that?

Finally, what sort of interest rates do they offer? While many basic checking accounts these days don't pay interest, most institutions will offer you the option of a savings account linked to your checking account. Especially if you have a large nest egg you plan to keep in a savings account, it's worth your while to seek out a bank or credit union that will give you a decent interest rate.