When you're looking for a financial institution to handle your cash, you have a large number of choices between local and national commercial banks, online banks and credit unions. Your choice depends on which services you need and whether you prefer face-to-face relationships or you're okay with the anonymity of an online banking relationship. Each type of financial institution has its advantages and disadvantages.
Let's look at the services a credit union offers to its members and how it's different from a traditional bank.
What Is a Credit Union?
Credit unions are financial institutions where the members own the credit union instead of outside shareholders. Credit unions are nonprofit organizations with the goal of providing services to their members rather than making a profit. Profits are invested back into the credit union rather than being distributed as dividends to shareholders.
The principal objective of a credit union is to help its members save money by offering higher interest rates on savings accounts and charging lower interest on loans. Credit unions have a more personalized interest in their customers than traditional commercial banks.
The credit union members vote and elect a volunteer board of directors. Each member has one vote in elections regardless of how much they have on deposit. Members of the board do not receive any compensation for their services.
The board sets credit union policy for membership, determines dividends for savings accounts and sets loan rates.
Like traditional banks, credit unions offer their members checking and savings accounts, certificates of deposit, and various types of loans and credit cards. While credit unions offer all of the basic services of traditional banks, they have fewer options for each product.
What Are the Membership Requirements?
Membership is based on some type of common interest. It could be where you live, some kind of work association, a charitable cause or religious affiliation. For example, a corporation could have a credit union that only accepts employees and their immediate family members. Or a particular school district may have a credit union only for its teachers. Some credit unions have more lax requirements and may only ask that their members live in a certain city or geographic area.
Those who qualify will usually pay a one-time membership fee and make a small initial deposit, like $25.
What Are the Advantages of Credit Unions?
Credit unions have several significant advantages over traditional banks.
Higher interest rates on deposits: Because credit unions are nonprofit, they are able to pay higher rates on savings accounts, money market accounts and even checking accounts. You may be able to find higher rates with online commercial banks, but credit unions usually have better rates than local banks.
Lower interest rates on loans and credit cards: For the same reason, credit unions are able to make loans at lower rates and offer credit cards at reduced interest.
Lower fees: Credit unions are not like banks that try to make additional profit from more fees. Many credit unions offer checking accounts with no minimum balance requirements and no monthly service charges. They may also offer free checks, withdrawals and electronic transfers.
More personalized customer service: Credit unions are more customer-oriented and more dedicated to improving the financial health of their members. You're more likely to be recognized by the teller at your local credit union than you would be at the branch of a large national bank.
More flexibility: Because of their member-focused strategy, credit unions are more willing to work with customers who have blemished credit histories. Large banks use algorithms to process thousands of credit applications and make decisions to approve or deny. Losing one customer is not a significant loss to a large bank.
A local credit union, on the other hand, is more likely to dedicate one of its people to help you find a solution to a problem. The credit union is more willing to make exceptions to the rules when necessary and work with members who are in good standing.
Read More: Negotiating Interest Rates With Credit Unions
What Are the Disadvantages of Credit Unions?
Because of their smaller size, credit unions have a few disadvantages.
Must be a member: Credit unions are formed to serve a particular group of members. If you don’t have an affiliation with an organization that has a credit union, you may have difficulty finding one to join.
Fewer products: Because they're smaller institutions, credit unions do not offer the large variety of products that are available at larger national banks. Bank of America, for example, offers several types of checking and savings accounts, a multitude of different types of credit cards, and a variety of loans and investment products. A local credit union may only offer one or two types of checking and savings accounts, one credit card and one auto loan.
Limited number of branches: A credit union may only have a main office and a few local branches. This can be inconvenient if you move away from the area and have to start making transactions by mail. Although credit unions have ATMs in their local branches, you may not find national access to your money when you're traveling.
Not as technologically sophisticated: Unfortunately, credit unions don't always stay up to date with the latest technology for their online services. They don't have the funds for building a sophisticated website that can compete with the options offered by large national banking systems. Don't expect to find a full-service mobile application on your smartphone for your local credit union.
Read More: What Is a Share Pledge Loan?
What Is the National Credit Union Administration?
Similar to the Federal Deposit Insurance Corporation (FDIC), which insures commercial banks, the National Credit Union Association (NCUA) insures deposits for credit unions. Deposits at federally chartered credit unions are insured by the NCUA up to $250,000. Even though a credit union may be small, members don't have to worry about the security of their savings accounts.
How to Choose Between Credit Unions vs. Banks
If you're looking for convenience, availability of a variety of products and the latest technology, a large national bank would be the better option.
But if you're looking for a financial institution that's more locally-based and offers better interest rates and lower fees, then a credit union would be your choice.
Since credit unions are owned by their members, the focus is more on a collaborative effort between the credit union and its members. One member's savings becomes a loan for another member.
- CNBC: What Is a Credit Union?
- CreditKarma: What Is a Credit Union?
- Nerdwallet: What Is a Credit Union? The Benefits of Membership
- Forbes: What’s the Difference Between a Bank and a Credit Union?
- Money Crashers: Credit Unions vs. Banks – Differences, Pros & Cons
- Investopedia: Credit Unions
- National Credit Union Association:About NCUA
- MyCreditUnion: About Credit Unions
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James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.