What Is a Credit Union?

Learn what a credit union is and how you can benefit from one.

Credit unions are nonprofit financial organizations that exist to serve their members, who are considered part owners. On the surface, credit unions function in much the same way banks do, offering customers a safe place to deposit funds and a full slate of financial products, including checking and savings accounts and loans. However, credit unions tend to take a more personal interest in the financial growth of their members. Account holders pool their money into the credit union, which serves as the organization’s funding.

Joining a credit union allows you the chance to participate as part owner of a financial institution that values the insights of its members.

If you are researching whether to join a credit union, make sure to review the following:

What Are the Differences Between Credit Unions and Banks?

Credit unions and banks offer most of the same financial products and services to customers. However, you can have an entirely different banking experience with a credit union than you would encounter with a traditional bank. Here are some of the key differences between banks and credit unions to consider:

1. Organizational Structure

A credit union is a tax-exempt, member-driven organization that aims to share its profits with members. Those profits can come in the form of reduced rates for loans and perks like free checking accounts. Members cast their votes for a volunteer board of directors, which manages the credit union. A traditional bank, however, has a group of shareholders and investors at the helm of its operations with a goal of turning a profit; as a result, they may be more focused on charging higher rates.

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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.

Compare: 20 Best Credit Unions for First Responders

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3. Rates

Because banks are more focused on maximizing profits for shareholders, they’re more likely to charge higher interest rates for loans and credit cards as well as higher fees for standard financial products like checking accounts. A credit union, on the other hand, typically extends more wallet-friendly rates on loans and fewer fees.

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4. Membership Requirements

Showing up with proof of identification is usually enough to qualify you for an account at a typical bank. Depending on the type of credit union, you may have to meet certain eligibility requirements. Certain credit unions only offer membership to those who share a common bond with the organization, such as individuals who work for a certain employer or organization, are related to a current member or are affiliated with certain groups or professional associations. In recent years, many credit unions have relaxed their eligibility requirements, making it fairly easy to find one that will offer you membership.

This chart, spotlighting the major differences between banks and credit unions, can help you decide what you’re looking for in a financial institution.

Key Differences Between Banks and Credit Unions
FeatureBanksCredit Unions
Organizational StructureFor-profit; directed by shareholders and investors

 

Not-for-profit; owned and operated by members; volunteer board of directors
Scale of OperationsDepends on the bank; national and regional banks have a large-scale presence, while local community banks might have one or two branchesTypically only a few branches within a certain area or community

 

RatesTypically lower interest rates on savings accounts and higher fees charged for products such as checking accounts

 

Tend to boast higher interest rates on savings accounts and lower interest on loans
Membership RequirementsMost can join May need to meet certain eligibility requirements, such as working for a certain employer, belonging to a church, being related to a current member or living in a certain geographical area

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Advantages of Credit Unions

Becoming a member of a credit union offers you a chance to participate in a financial organization that prioritizes the financial health and well-being of its members. Here are some of the major advantages of credit unions.

Better Rates

As a credit union member, you’ll 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. Translation: More money in your pocket.

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Lower Fees

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.

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Customer Service

As smaller organizations that depend on the participation of their members to succeed, credit unions can deliver exceptional customer service. You’re more likely to develop relationships with credit union employees, especially if you frequent your local branch. Credit unions extend other benefits, such as budgeting tools and other guidance to allow their members to achieve their financial goals.

Find Out: How To Join a Military Credit Union Without Joining the Service

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Community Involvement

At the heart of a credit union is a shared interest in the community. Credit unions are founded to benefit the local community. Many credit unions spearhead charitable events, organize financial literacy programs and partner with other local organizations to support the community.

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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.

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Disadvantages of Credit Unions

On the flip side, credit unions may not be the ideal choice if you are seeking out different priorities in your financial institutions. These are the major disadvantages of credit unions:

Locations

You’re not likely to find your credit union in another city or town. Generally, credit unions concentrate in a specific geographical area, which can be inconvenient when you travel to a different area and need to access your funds.

Check Out: 12 Best Credit Unions for Car Loans

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Technology

Credit unions tend to lag a bit behind traditional banks in their tech-friendly features. Banks usually thrust their profits behind the latest technological developments, with mobile apps and websites aimed to create a smooth, user-friendly experience. You might not find emerging trends such as mobile deposits at your local credit union.

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Membership Concerns

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.

See: How a Credit Union Membership Can Save You Money

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Services and Options

The menu of financial products and services is not quite as extensive as you would find in a traditional bank. Although credit unions have made excellent strides and many match the services of big banks, it is dependent on each credit union what products and services you will be able to find. Therefore, you might not be able to access all of your needs — such as a commercial mortgage loan, for example. Be sure to read up on what your local credit union provides before signing on, just like you would with a commercial bank.

Don’t Miss: 5 Best Credit Unions for Personal Loans

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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

Federally chartered credit unions ensure their members’ funds with National Credit Union Share Insurance (NCUSIF), which offers up to $250,000 in insurance protection per account. To determine whether a federally chartered credit union is backed by the U.S. government, look for the official National Credit Union Association (NCUA) insurance sign on its website or branch location or the word “federal” in the name.

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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.

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Do Credit Unions Use ChexSystems?

More than 80% of banks and credit unions rely on reports from ChexSystems or Early Warning Services to determine whether to approve applicants for accounts, according to the National Consumer Law Center. ChexSystems reports list your history as a banking customer, including the not-so-flattering details such as overdrafts, NSF checks, unpaid fees or fraudulent activity. Some credit unions may offer a “second chance checking account” to those individuals who may have been denied accounts elsewhere. These accounts might come with a steeper monthly fee, but you’ll be able to graduate to a regular account if you can successfully manage your account for a certain time period.

Bottom line: Just as not all banks use ChexSystems, there are credit unions that do not subscribe as well. Generally, credit unions are far more welcoming to customers with flawed financial and credit records.

Related: 9 Banks That Do Not Use ChexSystems

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How Do You Join a Credit Union?

Joining a credit union allows you to participate in a community-driven organization that exists to benefit the financial goals and interests of its members. If you belong to a certain group or class of professionals, you may want to join a credit union where you’ll be banking alongside peers of similar backgrounds and occupations; alternatively, the credit union might extend membership based on your church, school affiliation or geographical location.

Once you determine that you meet the credit union’s membership criteria, follow these next steps:

  1. 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.
  2. Pay a one-time setup fee, usually between $5 and $25.
  3. Meet with a financial advisor at the credit union to set up your accounts and discuss your financial goals and needs.

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Is Joining a Credit Union Right for You?

Credit unions offer a personalized local alternative to traditional banking institutions. As with any other financial decision, choosing to join a credit union can have both benefits and drawbacks. Evaluate which factors matter most to you in a financial institution. Ultimately, it comes down to your own personal values and priorities.

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Click through to find out more about the best credit unions of 2020.

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This article has been updated with additional reporting since its original publication.

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About the Author

Barri Segal has 20+ years of experience in the publishing and advertising industries, writing and editing for all styles, genres, mediums, and audiences. She has been writing on personal finance topics for 12 years and gains great satisfaction from making a difference in consumers’ lives.