What is a Credit Union?
When you look at them from afar, banks and credit unions appear to be identical. Looking closely, you’ll find that credit unions are not for profit financial institutions that offer most products and services that you will also find in banks.
You can open a standard saving and checking account, get a Certificate of Deposit or invest in a money market account in a credit union. They can also grant a mortgage or home equity loans, personal loans and even auto loans to qualified borrowers.
Credit Unions Vs Banks
Other than that, there are a couple of differences between banks and credit unions:
- Taxation – Because of its nature as a non-profit organization, credit unions do not pay the same taxes that banks do.
- Availability – Credit unions cannot be as competitive as banks in terms of the financial services that they offer because of their limited income and geographic presence.
- Eligibility Requirements – While you may find it easy to just walk into a bank and open an account, that is not always the case with a credit union.To keep their tax-favored status, the law requires credit unions to limit their customer base to a group of people who all share a common distinction. The law calls this the “field of membership”.
- Safety and Guarantee – Safety will often come up as an issue when people choose between a bank and a credit union. Many people are not aware that most credit unions carry federal insurance, the backing of the NCUSIF and the U.S. government. Banks rely on the FDIC, which is another government agency, for their deposit insurance.
- Technology – Don’t expect credit unions to be abreast with the latest technology in banking. The big banks have deeper pockets, so they have the luxury to invest in cutting-edge technology as fast as they come. Credit unions can’t always do that.
The people who originally came up with the idea for a credit union designed it to be a cooperative financial institution for people with a common bond. Members of a credit union would have a common denominator: they may be working for the same company, attended the same college, served in a branch of the armed forces, belong to the same church, or residents of the same community. This business model has gained popularity over the years.
According to the Washington Post, 100 million Americans are bona fide members of a credit union.
Collectively, credit unions have more than $615 billion in deposit liabilities. Around the world, you can find more than 46,000 credit unions boasting of more than 172 million members.
Why Do Credit Unions Exist?
Credit unions aim to encourage members primarily to save money through the products and services that they offer. They also help their members achieve their personal goals by offering them loans. In fact, credit unions are popular because they provide access to loans to ordinary people.
Members also benefit from lower loan rates and higher dividends on savings because credit unions are nonprofit cooperatives. So instead of paying profits to stockholders, credit unions return the earnings to their members through improved services or dividends.
Credit Union – What Do They Offer?
Like banks, the actual products and services you can find in a credit union will vary from one credit union to the next. There are large credit unions that carry a broader variety of products while some smaller credit unions would just keep their offerings to a minimum.
But don’t let the term ‘small’ deceive you. Some of these so-called small credit unions can synergize with other organizations to address your demands. Contact your local credit union to inquire about services, charges, and technology options (like apps) as you decide on them as an alternative to banks.
Here are some of the basic products of credit unions – most of them are similar to what banks offer:
- Savings accounts and ATM cards
- Checking accounts
- Money market and IRA accounts
- Credit cards
- Secured or unsecured personal loans
- Mortgages and home equity loans
- Auto and recreational vehicle loans
- Travelers' cheques, money orders, certified checks, and foreign exchange
Joining a Credit Union
The Federal Credit Union Act allows anyone to apply and join a credit union as long as he or she shares a common bond of employer, educational institution, branch of the military or government, church or community.
As we can see, over the years, credit unions have grown and evolved such that almost everyone is now eligible for membership through one form of connection or another.
Check out these ways to find out if you can become a member of a credit union:
- Inquire with your human resources department at work. Your employer may have access to a credit union or may be able to sponsor you to join one.
- Ask your family members (immediate and extended) if their employers provide their employees with access to a credit union. Many credit unions extend the membership privilege to family members – some of them even allow cousins to join.
- Ask around from friends, neighbors, and acquaintances if they know of any community credit unions, either for your local community, county, or city.
You can do your search by using the online search tools that CUNA provides or call your state credit union league. Joining usually starts by filling out and submitting an application form – usually online. Credit unions will need you to prove your eligibility so be ready to provide the name of a relative, employer, group, or organization where you have affiliated yourself.
Then, they will ask you to provide some standard personal information like where you live, where you work and your income. After you’ve done that, you can begin to select which products or financial services you need.
Credit Unions – Pros and Cons
Credit unions offer some great benefits for most of the customers. However, they still lack many important features and their accessibility for customers may be limited in many states.
|More Focused on Customers||You Must Become a Member|
|Better Rates||Fewer Products|
|Lower Fees||Limited Online Facilities|
|Flexibility||Limited Branch Locations and ATMs|
Here are the main advantages and disadvantages you should take into account when joining a credit union:
Advantages of a Credit Union
As previously said, you can find the same products and services that banks offer in a credit union: savings accounts, checking accounts, mortgages, lines of credit, auto loans and electronic banking products including ATMs. You can even find credit unions that sell stocks and rent out safe deposit boxes – although these are usually the big ones.
However, a credit union would have a distinct advantage over traditional banks because they often provide more benefits to their members.
More Focused on Customers
Being a customer of a credit union (such as being a savings account holder) means being a member of the institution. The credit union exists to satisfy its members or shareholders, not stockholders like private banks. This means that they do not primarily focus on generating big profits but rather on providing the best customer service and support possible for their members.
This is not lip service because many of the policies of credit unions are actually customer-friendly and customer-focused. There are even credit unions that allow members to vote and have a say on policies that govern their accounts.
You will see that credit unions have policies that are friendlier and more lenient if you make a mistake or have a rather poor credit history. On top of this, you may find that the employees are more accommodating to help you in case you find yourself in a difficult situation.
Not only do credit unions offer lower rates on loans but they also give higher rates on deposits, whether they be a savings account, Certificates of Deposit, IRAs or money market accounts. Remember that they are not-for-profit organizations so they can redirect any surplus funds to their customers.
Aside from offering higher deposit rates, they also have a lower fee structure as well. Since they don’t really exist to make tons of money, they don’t have to get more from the members. In fact, they help the members to keep their money intact – just another way of showing that the members are their first priority.
Let’s face it – you hardly stand a chance of getting a loan or a simple credit card from a bank if you have a blemished credit history, issues with your employment, or can’t make a large deposit. Banks receive thousands of applications every month so they need to set some strict requirements on income, credit scores, deposits, etc. to filter out the less creditworthy ones.
So, if you don’t meet the requirements, the bank will automatically decline your application without further review. After all, one lost customer for them is hardly a drop in the bucket of their mega millions in profit.
But since credit unions are relatively smaller and have a member-focused philosophy, they are more open to members even if they have a not-so-ideal financial history.
They are also able to make exceptions for existing members in good standing in cases when unexpected issues come out in relation with your application for a loan or credit.
Disadvantages of a Credit Union
You might be thinking that a credit union is better than a traditional bank to do your financial transactions, but it is not downright perfect. Like any institution, you need to consider the pros and cons before you decide to join.
You Must Become a Member
In order to avail of any product or service, you must first become a member of the credit union and you can only become one if you were eligible in the first place.
After that, you’ll need to shell out some money for a minimum opening balance when you create your account. That can be anywhere from $5 to $25.
Let’s face it: banks have more assets and bigger capitals compared to a credit union.
This allows the banks to have the freedom and ability to offer a wider variety of products and give out larger loans, like for a house or business capital.
Being a small association, a credit union will not have enough resources to try to be a par with the banks in that particular area.
Limited Online Facilities
Don’t expect your credit union to have the latest digital online banking facilities – most of them do not invest in sophisticated modern technology. For banks, going online was something almost mandatory in order to be competitive.
With your small bank, you can view your current balance, do fund transfers, apply for credit cards and loans, pay bills, invest, request for statements using just one customer-friendly online interface. You can also receive statements, bulletins and offers electronically as long as you register your email address with them. You can even link your account to other financial tools to help you manage your funds better.
While you may find a credit union with an online banking facility, it would probably be very basic.
It may just be able to let you see your recent account activity or transfer funds to another credit union account and not much more.
Limited Branch Locations and ATMs
Many credit unions are single-location enterprise. Yes, the small, family-like atmosphere in the credit unions is what draws many customers to them but lacking multiple branches could become an inconvenience to many. The good thing is that most credit unions are already part of a shared ATM network so their customers can use the ATMs of other banks or credit unions within the network.
Not all credit unions provide deposit insurance. With banks, you can rest assured that the FDIC has got your back in case something happens to the bank. For credit unions, the U.S. government provides insurance through the National Credit Union Administration. But here’s the thing: it is not mandatory so not all credit unions have insurance.
Credit unions have started to join the credit card bandwagon and they are doing good business. The thing is, most credit unions have not embraced the idea of rewarding cardholders as most bank has done. In fact, only 19% of all credit union credit cards carry cashback benefits.
How To Choose a Credit Union
You may already be sold to the idea that a credit union is better for you than a bank. However, it is good to do your own research to find one that can really meet your needs. As of the end of 2016, there were 5,757 credit unions in the US and about 60 of them support nationwide membership. They are not as accessible as banks, but for those who are willing to do a little work, they are just there.
The next step is identifying which services you want to avail and investigating which credit unions offer those services. Credit unions are not all the same and one could be different from the next one in town. Check them out and never assume that the one near your place has all the extras that the one in the next county offers.
What's Your Goal?
For example, if you want a credit union that offers online and mobile banking, you’ll have a bigger chance if you join one of the larger national credit unions to get this service. If your objective is to secure a low-interest credit card or a low-rate auto loan, you can probably find that at smaller credit unions.
And lastly, credit unions can be a safe, reliable alternative to traditional banks but nobody says you can’t open an account at both places to enjoy their full advantage. Either way, do your homework and make some research before you decide.