What Is a Credit Union?
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- Credit unions are financial institutions, similar to banks, that provide members with a variety of financial services.
- Credit unions are not-for-profit organizations that are consumer-focused and for members only. Banks are for-profit financial institutions that are generally available to anyone.
- Credit unions can be a great option for managing your money, but it's important to understand their pros and cons.
Credit unions are organizations, similar to banks, that provide members with financial services. Like banks, most credit unions offer checking and savings accounts, electronic banking options and the ability to take out mortgages and other loans.
However, credit unions differ from banks in a few key ways. Mainly, credit unions are nonprofit, member-only organizations that aim to give members a sense of community and individual attention that's often missing at a commercial bank.
How credit unions compare to banks
Credit unions and banks offer similar financial services. However, there are differences in the way each organization is structured and whom they serve.
Commercial banks are privately owned, for-profit businesses. Banks don't offer memberships, and most people can become a customer by providing identification and a minimum deposit.
Credit unions, on the other hand, are nonprofit organizations with an interest in serving communities directly. When you use a credit union, you become part member, part owner. Members may also elect a board of directors who can run the credit union in a way that serves their members' interests.
Unlike a bank, a credit union doesn't profit from interest rates or loan fees. Instead, any earnings go back into the credit union to benefit its members. As a result, credit unions are often able to offer members much lower interest rates and fees than a commercial bank. They may also offer financial education and take steps toward supporting small business needs in their community.
As a tradeoff for this hands-on service, credit unions have relatively strict membership requirements, which means not every individual will qualify for membership. Credit unions also may have fewer options when it comes to loans and credit cards.
Both credit unions and banks generally insure deposits up to $250,000. However, there's a difference in the source of the insurance. Credit union accounts are backed by the National Credit Union Administration, while banks are insured by the Federal Deposit Insurance Corporation.
Advantages of credit unions
Provided you qualify for membership, credit unions can be a great option for managing your money. Pros of joining a credit union include:
- Lower interest rates on credit cards and loans. Because credit unions are nonprofit, they can pass earnings directly to members in the form of lower interest rates.
- Lower fees for certain products. This might include fees for credit card transfers or loans. Some credit unions may waive a particular fee entirely.
- Personalized customer service, with products that benefit a specific community. Credit unions are directly invested in the communities they serve. For instance, credit unions that cater to the armed services may offer specialized products for active-duty military members. The financial education and outreach provided by many credit unions are also tailored to their members' needs.
Disadvantages of credit unions
Credit unions aren't without their drawbacks. Some potential cons of joining a credit union include:
- Eligibility requirements may limit customers. Credit unions typically serve a specific geographic location or community of people.
- Limited physical branches. Credit unions may have fewer locations where you can deposit funds or withdraw money from an in-network ATM.
- Fewer options and perks for credit cardholders. Smaller credit unions may not be able to provide members with the large sign-up bonuses or favorable cashback rates that major commercial banks can offer.
- Limited access to online banking. Due to their smaller size, credit unions may not have the resources to invest in online or mobile banking services.
How to join a credit union
If you're interested in joining a credit union, look for one that meets your specific needs. Credit unions exist on both nationwide and local levels.
Keep in mind that not everyone qualifies for every type of credit union. Members must meet one or more common bonds, known as a “field of membership.” A few examples of a common bond include:
- Your employer. Some employers sponsor credit unions for their employees.
- Your family. Many credit unions will allow the family members of existing members to join.
- Your geographic location. Some credit unions offer membership to anyone who lives, works or attends school within a certain area.
- Your association with a specific group. You may qualify for membership based on your labor union, school, place of worship or other organization.
In addition to meeting a credit union's field-of-membership requirements, you may have to open an account with a small deposit and pay a one-time membership fee, typically up to $25.
Remember that the field of membership varies for each credit union. So, before applying for membership, be sure to review the specific requirements of any credit union you hope to join.