A credit union is a non-profit financial institution that is run by its members and serves the financial needs of its members. Credit unions offer many of the same products that banks offer, such as checking and savings accounts, deposits, loans, credit cards, and other financial needs.
Credit unions often have advantages over banks. They may offer more personal service, advantageous interest rates, easier approval and greater opportunities for financial education. Banks also have advantages, and there are some circumstances where a conventional bank may be a better choice for you. Understanding the differences between credit unions and banks and the advantages and disadvantages of each can help you select the right institution for your needs.
What Makes a Credit Union Different?
Like banks, credit unions provide financial products. They accept deposits in various types of accounts. They make loans and issue credit cards.
So, what makes a credit union different? Here are some of the major differences:
- A credit union is owned by its members. When you open an account, you become a member and a part-owner. You will vote for members of the board of directors.
- A credit union exists to serve a specific group that shares a “common bond”. Many credit unions serve a particular community, group of employees, faith, or another group. Many credit unions have loosened their membership restrictions, but you may have to meet membership requirements to join.
- A credit union is a not-for-profit institution and does not pay income tax. It exists to serve its members, not to generate profits for owners or investors.
These differences create some substantial advantages for credit unions and their customers, and also produce some potential disadvantages.
Advantages and Disadvantages of Credit Unions
Which would be better for you, a credit union or a bank? Here are some of the advantages of a credit union.
- More personalized service. Credit Unions are owned by their customers and are often more willing to provide personal service to smaller customers than a bank might be. Many credit unions have only one branch, so decision-makers are accessible at all times.
- Higher interest rates on deposits. Credit unions put their profits back into operations, rather than paying them to shareholders. Credit unions often return some profit to their owner/customers in the form of higher interest rates on savings accounts, money market accounts, and certificates of deposit (CDs).
- Lower interest rates and fees on loans and credit cards. Credit unions are not under pressure to generate profit, so they can afford to offer lower interest rates and fees on their loans and credit cards.
- Lower minimum deposits. Credit unions often have lower minimum balance requirements for accounts, which can save money on fees if you often run a low balance.
- More flexible approval standards on loans and credit cards. Credit unions often offer loans and credit cards tailored for customers with credit problems. Decision-makers are often willing to consider personal circumstances and work to find a way to serve member needs. Some even offer payday alternative loans to help members avoid high-interest payday loans.
- Credit counseling and financial education. Many credit unions offer various forms of ongoing financial education and may be willing to provide individual credit counseling. Credit unions tend to focus on helping customers that are having financial problems, rather than avoiding them or refusing to serve them.
- Community service. Many credit unions have close ties to the communities they serve and are active participants in community service programs.
There are also some areas in which credit unions may have disadvantages:
- Fewer product and service options. Banks typically offer a wider variety of loans, credit cards, and deposits. This may not be a problem if your needs are basic but could be an issue if you have specific needs or preferences.
- Smaller branch and ATM networks. Credit unions may only have branches in the community they serve. Some have only a single branch. Many credit unions have joined ATM networks that provide greater reach, but if a large branch network is a priority a credit union may not be your best choice.
- Less sophisticated technology and fewer online banking options. Most credit unions don’t have the tech budget that a larger bank would have, so their mobile apps and online banking options may be more limited and less sophisticated than those of larger banks.
- Shorter working hours. While many banks are embracing longer business hours and Saturday availability, credit unions are likely to stick to traditional banking hours. Credit unions are also less likely to offer 24/7 customer service by phone.
You’ll need to assess these advantages and disadvantages and decide what type of financial institution meets your priorities. If you need a nationwide branch network and a well-developed online banking capacity, you may prefer a conventional bank. If you’re based in one location and prefer a smaller, more service-oriented institution you may prefer a credit union.
Are Credit Union Deposits Insured?
Bank deposits are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). If the bank fails, you will get your money back.
The FDIC does not insure credit union deposits. The National Credit Union Administration (NCUA) regulates federally chartered credit unions and those based in several states. The NCUA provides insurance of up to $250,000 per account. If a credit union has the word “federal” in its name, it is federally chartered and insured by the NCUA.
Credit unions without the word “federal” in their name are usually state-chartered. Some may be insured through state agencies. You may wish to inquire about deposit insurance before joining a credit union that is not federally chartered.
Can I Join a Credit Union?
Most of the time you can join a credit union, so long as it is open to public membership. Many credit unions are limited to members who belong to a specific group or share a specific relationship or connection, sometimes called a “field of membership”.
Some typical community restrictions for credit unions include:
- Employees of some companies or government agencies may have access to a credit union serving employees of that organization.
- Community-based credit unions serve people who live, work, or study in a particular community.
- Schools, religious groups, labor unions and places of worship may have their own credit unions.
- Some national credit unions are open to anyone who makes a small charitable donation.
Most credit unions allow members who leave the group to continue their membership, and many will allow family members of qualified individuals to join.
The popularity of credit unions is rising rapidly and almost anyone can find a credit union that they are eligible to join. You will still have to evaluate the credit union you’re considering and decide whether it fits your needs.
Choosing a Bank or Credit Union
Your choice of a bank or credit union is highly personal. It has to be based on your priorities and needs. If you find a credit union that you’re eligible to join, you’ll want to compare its offerings with those of local banks and local branches of national banks.
Before you compare, think about your priorities. What are you looking for in a financial institution? Consider these and other factors:
- Interest Rates Paid. If you’re just planning to keep a checking account, you may not be concerned with the interest you earn. If you’re planning to maintain a savings account or considering a money market account or certificate of deposit (CD), you’ll want the highest interest you can get.
- Interest Rates Charged. There’s no rule that says you have to borrow from your own bank or credit union, but it’s often advantageous to do exactly that. Your bank knows your financial history and if you have direct access to loan officers you may be able to make a better deal than you could from an outside lender. If you’re considering sourcing loans or credit cards from your own bank, you’ll want to choose one that offers good terms.
- Fees. Bank fees can add up to a significant sum. You may not be concerned with all fees but look closely at your banking habits and see what fees might matter to you. If you often use ATMs outside your network, you won’t want to pay a fee to do that. If you often run low balances or overdraw your checking account you’ll want to look closely at overdraft and below minimum balance fees.
- Minimum Balances. Many banks expect you to keep a minimum amount in your balance or a minimum average monthly balance. Failure to maintain this minimum may trigger fees. If you often operate with a low balance in your account, look closely at these requirements.
- Product Offerings. If you’re just looking for a simple checking or savings account, this may not be a major consideration. If you are (or expect to be) in the market for different types of loans, retirement accounts, savings products like money market accounts or CDs, be sure to look for a financial institution that offers these services.
- Customer Service. Customer service is always important, but what kind of service do you need? Would you rather have a bank with a 24/7 service hotline that you can reach from anywhere in the world or a bank where you can walk into the office and the manager or loan officer knows your name? Think about your service priorities, read online reviews, and see what matches your needs.
- Branch and ATM Networks. Do you expect to do all of your banking in one place, or do you need a widespread branch and ATM network? Look for an institution that matches your requirements.
- Online Access. Not everybody uses online banking and not everyone cares if they have the most modern mobile banking app. For others, these may be make-or-break factors. Know your needs and choose accordingly.
Once you have your personal shopping list, you’re ready to make the comparisons that matter to you. Don’t be swayed by glossy ads for services that you won’t use! You have lots of options: credit unions, local banks, local branches of national banks, even online banking. Consider them all and decide what will work for you.
The Bottom Line
Credit unions offer many of the same products and services as banks, but with fundamental differences in ownership structure and purpose. A bank exists to generate profit for its owners and investors. A credit union exists to serve the needs of its members/owners.
Credit unions may not be the right choice for everyone, but they are an important option that’s worth a close look if you’re looking for a financial institution. Your choice of a bank or credit union will be based on your personal needs and priorities.