According to the National Credit Union Administration (NCUA), there are over 5,000 federally insured credit unions in the United States serving over 124 million members.
Credit unions offer many perks that traditional banks don’t, including better rates and more personalized service.
But fully understanding what credit unions are all about will help you decide if they’re the right choice for you.
What is a Credit Union?
A credit union is a financial institution that works like a bank in that they accept deposits, make loans, and provides many of the typical financial services.
But there are a few key differences between banks and credit unions, with the biggest being that banks are for-profit organizations, while credit unions are nonprofit.
Are Credit Unions Non-profit?
Credit unions are non-profit organizations. This doesn’t mean that they offer their services for free, of course.
Instead, it means that they pass along profits back to members in the form of reduced fees, higher rates on savings, programs that serve the community, or back into their operations to grow their reach.
On the other hand, banks are in business to make money. They make money in different ways, including the interest rate you pay on your mortgage and other loans, and bank fees such as origination, monthly maintenance, and NSF (non-sufficient funds).
Of course, these are not the only ways banks make money, and each bank may have its unique business model. But regardless, they exist to make a profit.
What products and services do credit unions offer?
Where you might expect their not-for-profit model to impact their product offering, credit unions actually still offer about the same range of products and services as a traditional bank.
Some banks may have a slightly wider range of services and products but, generally speaking, you’ll find that both serve the basics:
Many also offer retirement accounts and life, home, and auto insurance (often through partners). And they’re known to offer more financial education opportunities to their members (though banks are coming around).
Additionally, depending on the credit union, you may actually find unique programs that better serve your needs. Let’s look into this in a little more detail next.
Members vs Customers
Because of the difference in models, account holders are each treated differently. Banks have customers, while credit unions have members.
This is why you first need to complete a membership form and any other required steps before applying for an account with a credit union.
When you join a bank, you become a customer of that bank. You pay for the services you receive and enjoy any rights that customers have.
When you join a credit union, on the other hand, you become a part-owner. You still have to pay for the services you receive (though these tend to be lower than what banks charge), but you also get to enjoy rights similar to shareholders of companies.
If the credit union opts to disburse revenue, you get paid dividends. You also get to vote about key issues and help elect the board of directors.
There are more benefits, which we’ll cover later.
Another important aspect of credit unions is location. Most credit unions are community-based, with only a few locations to serve members in their local area.
There are many large credit unions that are available nationally, but even those tend to have only a few branches, primarily in major cities.
That’s to say that if in-person service is important to you, you’ll need to find a credit union close to home. And even still, know that you’ll be pushed to online or phone support when you travel.
Fortunately, like online banks that serve virtual customers, most credit unions have apps and online tools that make it easy to skip the branch and bank from almost anywhere.
Just like FDIC insurance, NCUA insures deposits up to $250,000.
In the spirit of serving their members, some credit unions go a step further with additional insurances. This can help account holders get coverage for larger balances.
It’s also important to note that while it’s best, as a general rule, to bank with a federally insured bank or credit union, both can alternatively be insured privately.
Just be sure to know these details and do your research!
Which Credit Union Should I Join?
While it can sometimes feel like the big national banks all blur together, most credit unions have a unique focus and values, which can influence which services and programs they offer.
To that end, there are two broad aspects you should consider when choosing the best credit union.
1. Financial Services
First and foremost, a credit union needs to meet your financial needs. When choosing a credit union, you should consider things like:
- Types of accounts offered
- APY rate on savings and checking accounts. Credit unions typically offer higher rates than traditional banks, but not always.
- Their fee structure
- Loans and mortgage products (and if they offer competitive loan rates)
- Features and ease of use of online and mobile banking
- Branch and ATM locations
2. Values and Unique Services
When comparing credit unions that equally meet your needs financially, you should then consider the credit union’s mission and the unique services or programs they offer as a result.
For example, some target military families, service workers, charitable giving, etc. If any of these align specifically with you, that can be a huge advantage over a traditional bank.
Other credit unions serve a local community. The “community” can be based on geographic location, employer, or membership in a group, such as place of worship, school, labor union, or homeowners’ association. Even without special programs, many credit union members appreciate knowing that banking with their credit union helps other members in their community. For example, your savings can become another member’s loan.
Once you’ve chosen a credit union, it’s time to join. More on that next.
How Do You Join a Credit Union?
Joining a credit union is different from opening a bank account. Joining a bank is pretty simple – you apply for an account or other financial products and services, and that’s it.
(Of course, that’s oversimplifying the process a tiny bit – in reality, a bank may take your application and run a soft credit check, and then decline you if your credit score is too low).
Credit unions, on the other hand, follow an entirely different procedure. To sign up for any of the products and services a credit union offers, you first need to become a member.
The process will be slightly different for each credit union, but requirements should be equally easy to find for all.
Broadly speaking, the process involves 3 steps:
- Verify eligibility for membership (more on that next)
- Complete an application, either online or at a local branch
- Pay a one-time membership fee, which is usually somewhere between $5 and $40
Are credit unions open to everyone?
Eligibility to a credit union is based on a shared common bond, or the credit union’s “field of membership”. You may be eligible based on:
- Employer. Large employers may sponsor their own credit union or partner with a locally established one.
- Family. Most of the time, if anyone in your immediate family is a member, you’ll also be granted eligibility. Sometimes this means your spouse or someone in your immediate household, while other credit unions allow membership if a parent or sibling is a member.
- Location. Many credit unions serve those who live, work, worship or attend school in a specific geographic area.
- Group. Eligibility can be based on your membership in another group, such as military, faith, homeowners’ association, school, etc.
- Donation. Some credit unions also extend eligibility to those who donate to the group they serve. For example, PenFed, a federal credit union serving military members, also extends membership to those who donate at least $17 to the National Military Family Organization or the Voices for America’s Troops. Obviously, their hope here is that you’ll continue to show support for the charities, but membership in most credit unions is a “once you’re in, you’re in for life” basis.
What Are The Advantages of a Credit Union?
Just like no two banks are exactly the same, no two credit unions are the same. So, the advantages of one may be different from the next.
But, broadly speaking, some of the benefits of joining a credit union versus a bank are:
- Higher rates on your savings and deposit accounts. Because credit unions are not-for-profit organizations, they tend to pay higher interest rates than a comparable bank.
- Lower loan rates. Like the above, being member-owned instead of profit-driven, credit unions typically offer more competitive rates for loan products. That’s not always the case, however, so definitely still shop around.
- Reduced or more forgiving fees. Credit unions typically have lower fees and are known for not nickel-and-diming their members. Again, however, that’s not always the case, and many community banks and FinTechs pride themselves on having this same approach.
- Community support. Credit unions reinvest in their communities and operate to support the well-being of their members. That means they may provide better financial education, and community outreach, or have more lax requirements for local small business loans or needs.
- Member cooperative. Many credit union members appreciate that the community aspect creates a cycle of mutual assistance for members. That means your deposits at a credit union can help another member or support community initiatives.
- Unique services or programs. Some credit unions have general criteria for membership, while others are niche focused and offer programs that cater specifically to their members. For example, Service Credit Union focuses on military members and government workers and consequently offers programs that guarantee income for those who aren’t paid on time, plus pays higher rates to active duty military.
- Better service and more flexibility. With smaller branches and fewer members, credit unions can often offer more personalized service. Additionally, they may be more forgiving if you’ve been denied an account at a bank, and members who have established a good relationship with their credit union can often barter for lower rates or request exceptions to standard procedures.
What Are the Disadvantages of a Credit Union?
There are, of course, some trade-offs when it comes to banking with a credit union versus a national bank.
- Fewer product options. Most credit unions will offer the basics, but they generally won’t have the same breadth of products and services that you can find at a large national bank.
- Less physical locations. The national chains will absolutely outnumber a credit union. For ATMs, many credit unions partner with larger networks to offer fee-free ATM withdrawals, but that’s not always the case.
- Technology. Depending on the size of the credit union, you may find outdated systems and technology at a credit union compared to what you’re used to at a national or online-only bank.
Not all of these disadvantages (or benefits, for that matter) apply to every credit union, however, so be sure to do your research before dismissing or joining a credit union.
Frequently Asked Questions
How does a credit union work?
A credit union works just like a bank with a few major differences. Unlike banks that have customers and are shareholder-owned, credit unions have members who vote on how the credit union is managed. To open an account at a credit union you first need to meet eligibility requirements and run through the application process to become a member.
How is a credit union different from a bank?
The biggest difference between a credit union and a bank is that banks have customers while credit unions have members. And, unlike banks that are for-profit, credit unions are nonprofit, meaning they pass along profits to their members or reinvest in their operations and programs.
What is a credit union in simple terms?
In simple terms, a credit union is a union between members that share a common bond, with that union’s purpose being to offer financial services to its members at cost.
What are the advantages of a credit union?
Generally speaking, credit unions are member-centric and offer reduced fees and lower interest rates on loans while offering higher savings rates (APY) and more relaxed requirements for account opening or loan approval.
Is a Credit Union Best for You?
Credit unions can be a great option if you’re looking for low-fee or free basic checking accounts, want to be part of a member-centric organization, and seek personalized service.
But credit unions may not work for someone who has more sophisticated financial needs, wants the convenience of a large branch network, or craves the absolute cutting edge in technology and features.
Ultimately, like banks, each credit union is unique. Federal credit unions serve a huge member base and will be entirely different from small community credit unions serving a specific county in a single state.
You should compare the national banks, online fintechs, and credit unions you’re eligible for before making a final choice about where to bank.