What is a credit union? Is it different from a bank?
When you’re managing your money, do you feel comfortable being just another number at a big bank? Or are you looking for a more personal feel to your finances? Depending on your situation and preferences, you might prefer a credit union.
But before joining a credit union, it’s smart to compare products, services, and fees to those available from a bank to determine what works best for you and your finances.
Key Points
- Credit unions are member owned and operate as not-for-profit financial institutions.
- Fees and interest rates on loans are often lower at credit unions, while savings rates are frequently higher.
- You can join a credit union and even be elected to sit on its board.
What is a credit union?
Credit unions are defined by the idea that members—that is, the customers who use the credit union—own it. Additionally, a credit union operates as a not-for-profit organization. Credit unions return excess profits to members through lower fees, higher savings yields, and lower interest rates on loans. And, as with other financial institutions, you may be eligible for lower rates if you have a good credit score.
When you decide to manage your money at a credit union, you aren’t just a customer; you join the credit union and become a member. A board of directors made up of volunteers manages the credit union. You can even put your name forward to be elected to the board.
How do credit unions work?
Credit unions work much like banks. As a credit union member, you can:
- Deposit money
- Open a transaction account (similar to a bank checking account)
- Borrow money for personal, home, and auto loans
- Use a debit card or ATM card to access your funds
- Manage your account online or through a mobile app
Some credit unions also offer investment accounts, such as individual retirement accounts (IRAs), mutual funds, and more.
Because they are not-for-profit institutions, credit unions are exempt from federal taxes. These savings, plus those from the fact that credit unions don’t keep profits, flow back to members. The Credit Union National Association (CUNA) estimates that members receive about $129 in financial benefits annually in the form of lower loan rates, higher saving rates, and fewer and lower fees than banks.
Federal charter vs. state charter
Credit unions have charters that are issued by either the federal or state government. For the most part, though, they’re run the same way, regardless of which authority provides the charter. Understanding where the charter came from can be helpful so you know which regulator to turn to if there’s a problem.
The National Credit Union Administration (NCUA) insures deposits at all federally chartered credit unions and most state-chartered credit unions through the National Credit Union Share Insurance Fund (NCUSIF). Accounts are insured for up to $250,000 for individual accounts—the same amount as at banks backed by the Federal Deposit Insurance Corporation (FDIC). If your credit union should fail, your money is safe provided the amount in your account is within the limits.
How to join a credit union
To join a credit union, you must meet the membership requirements. These requirements, known as “field of membership,” show that you have something in common with other members. Depending on the credit union, membership might be based on:
- Geographic location, such as a county or region
- Employer or school
- Organizational membership, such as a professional or charitable organization
- Family members
Double-check the requirements to join the credit union. Some credit unions serve the employees of local companies or small businesses. If you’re a student, you might be able to join a credit union associated with your school.
Other credit unions try to cast a wider net, seeking to draw consumers nationwide. These tend to make becoming a member easy. For example, you might need to join a national organization and pay a small fee to become a member if you don’t meet other criteria.
As a member, you are required to have a “share” account, which is similar to a savings account at a bank. Credit unions typically require you to maintain a minimum amount in the share account, often as little as $25.
Pros and cons of credit unions
| Advantages of credit unions | Disadvantages of credit unions |
|---|---|
| Lower rates on many loans | Must meet membership requirements |
| Local involvement in credit union management | Some credit unions offer limited products compared to banks |
| Potentially higher yields on savings products | Fewer branches can make it difficult to access money while traveling |
Before choosing a credit union, compare the advantages and disadvantages. Although some consumers like the personal touch of a credit union, the smaller size of community and state-chartered credit unions may mean they offer fewer products and services.
It’s also a good idea to find out whether your credit union belongs to a broader network, especially if you frequently withdraw funds from an ATM. For example, check to see if fee-free ATMs are available nationwide, and review the policies for ATM fee refunds.
Credit union FAQs
What are the membership requirements of credit unions? Membership requirements vary depending on the credit union and how it’s chartered. Some have broad criteria, allowing anyone to join if they pay a fee to a partner organization or live in a geographic area. Others are narrow, requiring you to work for a particular company or attend a specific school.
Is my money insured at a credit union? Yes, the NCUSIF insures members’ money for up to $250,000 per shareholder per account type.
How are credit unions different from banks? Credit unions are owned by their members and operate as not-for-profit financial institutions. Banks are for-profit businesses that are privately held or publicly traded.
The bottom line
Credit unions offer many of the same benefits and products as banks, but because they’re owned by members, a credit union may provide greater access to personal services and community interaction. Also, many credit unions offer lower interest rates on consumer loans and sometimes higher deposit yields (although some online-only banks might offer higher savings yields).
Consider your financial situation and what you’re looking for in a banking relationship. Depending on your habits and preferences, joining a credit union might be a smart move.