A credit union is another financial institution that are nonprofit and exist to serve their customers, who are considered part owners. Basically, they do the same things that banks do, such as acting as a place where customers can deposit their funds, apply for loans, and open checking and savings accounts.
The stand out feature of a credit union is that they care more about their members’ financial growth. If this all sounds interesting to you, be sure to consider all the things below before making your decision.
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What Are the Differences Between Credit Unions and Banks?
As mentioned above, credit unions and banks offer similar financial products and services to their customers. However, what sets them apart is the banking experience you’ll have with a credit union compared to a bank. Here are some key differences.
1. Organizational Structure
A credit union is tax-exempt, member-driven and is aimed at sharing their profits with their members. These perks can come in the form of reduced rates for loans and free checking accounts.
Members can even cast their votes for a volunteer board of directors, which manages the credit union. In contrast, a traditional bank has a group of shareholders and investors that helps manage the bank with a goal of turning a profit.
2. Scale of Operations
Banks usually maintain a more national or regional presence. When you travel, you can enjoy the convenience of visiting one of the many branches of a large bank and using the ATM.
Credit unions tend to have a smaller scale of operations and are usually concentrated in a single area. To compensate, credit unions allow members to deposit checks and access their funds in a network of cooperative credit unions across the country.
Due to banks’ interests in maximizing profits, they may charge a higher interest rate on certain financial products. A credit union, however, will tend to have lower rates on loans and fewer fees.
4. Membership Requirements
Showing up with proof of identification is usually enough to qualify you for an account at a typical bank. However, depending on the type of credit union, you may have to meet certain special requirements. For example, some credit unions only offer memberships to those who share a common bond with the organization. This can include individuals who work for a certain employer or organization, are related to a current member or are affiliated with a certain group or association.
Advantages of Credit Unions
If you do decide to become a member of a credit union, know that you’re going to be part of an organization that puts the financial well-being of their customers above all else. Here are some of the major advantages of a credit union.
As a credit union member, since their focus is to return profits back to their customers, you will enjoy lower rates on loans and higher interest rates on savings accounts. That’s especially true if you have had a more difficult or complicated financial history.
Lower fees and discounted loan rates are among the top perks of credit unions. Because credit unions aren’t focused on maximizing profits, those savings pass on to you in the form of lower rates.
Smaller organizations that depend of the satisfaction of their customers to succeed tend to deliver great customer service. They don’t make money unless you do. If you’re the type to frequent the local branch, then you’ll probably develop a relationship with the employees quickly. Credit unions even offer a variety of budgeting tools and more to help their members.
The heart of the credit union is that they have an interest in the community. They are founded to benefit the local community and they tend to sponsor charitable events, organize financial literacy programs and partner with other local organizations to support the community.
Ability To Participate
As a member, you earn the right to vote for the board of directors that runs your organization. That democratic premise extends to other benefits, too. For example, credit unions may solicit members’ feedback for possible improvements or changes.
Disadvantages of Credit Unions
Although we’ve talked about how good a credit union can be, there are a couple of downsides. Some of these disadvantages are related to what you are looking for in a financial institution.
A major downside because credit unions tend to be local and if you don’t live near one, you aren’t going to be able to take advantage of their perks. Also, credit unions tend to concentrate in a single geographical area.
Credit unions tend to be behind in offering technological features unlike their bank counterparts. Banks tend to put all their profits behind the latest technological development, such as mobile apps and websites.
Becoming a member will cost a small upfront fee — usually between $5 and $25. However, certain credit unions require you to belong to a certain group or work for a particular employer. That could limit your options if you can’t find a credit union in your area with more lenient membership criteria.
Services and Options
Not all credit unions are created equal, and that goes to say what products and services they offer too. Although they do a good job of keeping up with banks, it is largely dependent on what credit union you decide to go with because they may not have what you want. Therefore, you might not be able to access all of your needs — such as a commercial mortgage loan, for example.
What Are the Different Types of Credit Unions?
While credit unions offer similar financial services, some might cater to a different group or association, such as military families, police officers, teachers and government employees. Credit unions can have a local, regional or national presence, and generally fall into two specific categories:
- Federally chartered credit unions
- State-chartered credit unions
Federally Chartered Credit Unions
As you can probably tell, federally chartered credit unions have their members’ funds backed with the U.S. government. More specifically, it is backed by the National Credit Union Share Insurance (NCUSIF), which offers up to $250,000 in insurance protection per account.
State-Chartered Credit Unions
State-chartered credit unions use private insurance to protect deposits. Your funds will be in good hands, but keep in mind that the insurance is not backed by the U.S. government and may not be as reliable.
Do Credit Unions Use ChexSystems?
More than 80% of credit unions and banks rely on reports from ChexSystems or Early Warning Services to determine whether or not to approve applicants for accounts. ChexSystems reports a list of your history as a banking customer, including all the negative information.
Some credit unions may offer these customers a “second chance checking account” to help rebuild the finances. To make sure they do, these accounts tend to have a higher monthly fee, but once you pay all of it off, you will be able to move to a regular account.
How Do You Join a Credit Union?
Joining a credit union is as simple as joining any other bank with some exceptions. If you’re already part of an organization or association that already banks with a certain credit union, it should be straightforward.
Once you determine that you meet the credit union’s membership criteria, follow these next steps:
- Research a credit union in your area that meets your needs. For help locating a nearby credit union, check out the NCUA’s Credit Union Locator.
- Pay a one-time setup fee, usually between $5 and $25.
- Meet with a financial advisor at the credit union to set up your accounts and discuss your financial goals and needs.
Go for a credit union if you want a more personalized local alternative to a traditional banking institution. Naturally, as with any financial decision, choosing to join a credit union can have their benefits and drawbacks, but it is up to you to see if the benefits outweigh the negatives. For more posts like this, check out our list of bank guides!