What Is a Credit Union?

A credit union is a lot like a bank, but with one big difference. It’s not for profit. So it’s not taxed. In theory, this allows credit unions to pay higher interest rates to account holders and charge lower interest rates to borrowers. Economic experts often refer to credit unions as one of the financial industry’s best-kept secrets. Read on to find out why. 

If you want more guidance on what financial institution best fits your financial plan, an experienced financial advisor can help you shape a strategy around your personal circumstances.

What Is a Credit Union?

As mentioned, a credit union is a not-for-profit financial institution that functions like a bank for its members. Credit unions are community oriented and are run democratically. Any member, regardless of asset level, is eligible to join the voluntary board of directors. This allows members to be involved in the union’s decision-making processes.

Some credit unions are small, hyper-local unions based on common connections like belonging to the same church or living in the same area, while others are national with thousands of participants. They offer many of the same products as banks, like checking accounts or mortgages.

However, you’ll typically see more favorable rates and requirements from a credit union than from a big bank. Credit unions also tend to incorporate financial counseling and education. Credit unions are able to offer more personalized services like these because their customer base is not as broad as a traditional bank. 

How Do Credit Unions Work?

Credit unions are financial cooperatives owned and operated by their members.  Members pool their money, creating a source for loans and other financial products. As a not-for-profit organization, the credit union may pay back any excess profits to these members as dividends. So in a sense, one person’s deposit becomes another member’s mortgage. 

Typically, members must meet certain qualifications to join a credit union, such as military service or having the same employer. Each credit union member gets a say in how the institution is run. As a member, you can cast your vote for the board of directors’ selections and other decisions. Traditional banks are led by majority stockholders, which means most shareholders don’t get a seat at the table. .

While the FDIC insures bank deposits, it is the National Credit Union Administration (NCUA) that ensures federally chartered credit union funds. State-chartered credit unions are held accountable to state banking laws or covered with private insurance.

Pros of Credit Unions

A huge advantage of credit unions lies in their not-for-profit structure, which means they don’t have to pay corporate income tax on earnings. That allows credit unions to put more of their funds towards daily operations, better services, and lower costs for members.

If you’re looking to save more money, credit unions may be the way to go. They tend to offer higher interest rates on savings accounts, lower rates on loans, and minimal fees for their services. These seemingly small differences can add up, boosting credit union members’ balances.

In addition to better-priced products, you’ll find more of a personalized, community feel at a credit union. To join a credit union, you often have to be a part of a certain community, often through a church, school, neighborhood, employer, or relative. Many who join credit unions report feeling more like  community members rather than customers. Plus, they have the ability to run for the union’s board of directors and be part of the governing process.

Cons of Credit Unions

While credit unions offer many benefits, membership does come with some drawbacks. For example, credit unions don’t have the kind of budgets big banks do. If you’re a business owner or need more niche financial products, a credit union may not be able to fund what you need. You can usually find most of the same types of services and products as big banks, but fewer options.

Many members find that their credit union falls especially short in their credit card offerings. Credit unions have limited rewards, so you probably won’t earn the same cash back, miles, or points rewards as you would with a bank’s card. If you’re used to scoring serious perks and major discounts, you may be disappointed if you switch to a credit union.

Finally, credit unions don’t provide the most convenient “banking” experience. Focused on smaller communities, credit unions often have fewer locations than banks. This limits your access to in-person services and even ATM access, especially when you’re traveling.

Branches also tend to operate only during traditional business hours. Plus, without the resources of a big bank, credit unions may not be able to offer the most robust online or mobile banking experience. Credit unions do try to combat these shortcomings by partnering together to widen ATM and branch offerings.

How to Join a Credit Union

Joining a credit union means becoming a member of a financial institution that works for the benefit of your community. You also become a partial owner of that financial institution. To join a credit union you have to open an account, usually with a modest minimum  payment around $25 or less. The size of your accounts does not determine your share in the credit union. Every member receives an equal vote and chance to run for the board of directors.

Credit unions are more exclusive than banks, though that is changing. Traditionally, unions base membership eligibility on one’s employer, place of worship, school, homeowners’ association or geographic location. Increasingly, though, unions are opening membership to the wider public. Many allow people related to members to join. And some may allow you to join after making a small, one-time donation to a particular charity.

Credit Unions vs. Banks: A Side-by-Side Comparison

While credit unions and traditional banks offer many of the same financial services — such as checking accounts, savings accounts, loans and credit cards — they operate in fundamentally different ways. These differences can impact everything from your interest rates and fees to the overall customer experience.

Credit unions are not-for-profit financial cooperatives that exist to serve their members. Profits are typically returned to members in the form of lower loan rates, higher savings yields and reduced fees. In contrast, banks are for-profit institutions that distribute profits to shareholders. Because of their business models, banks may offer more technology-driven conveniences but tend to charge higher fees and offer less favorable rates.

The table below can help you see how the two compare across key categories:

Bottom Line

Credit unions provide a solid alternative to big banks. Before you join a credit union, make sure it’s the right one for you. You’ll want it to offer the kinds of accounts and products you need – under favorable terms. Certainly, if you’ll be parking substantial savings there, you want to earn a competitive interest rate. It may help to read reviews online and double-check the credit unions’ insurance plans. A financial advisor can always help you learn more.

Tips for Responsible Banking

• Where you bank and what accounts you open should be part of your larger financial strategy. If you don’t have a plan for your finances, then you may want to work with a professional like a financial advisor who can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Credit card rewards can help you save but you have to spend to save. So be sure that when racking up the points, you are also using your credit responsibly.
• Avoid unnecessary banking fees. Maybe you’re paying a monthly service fee when a free checking account with the exact same perks is available. Or perhaps you didn’t realize your bank is charging you for paper statements. It can help to double-check your statements to consolidate your spending and save some cash.

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