What is a credit union?
A credit union is a nonprofit organization that allows its members to borrow and deposit money just like a bank would. The key difference between credit unions and banks is that banks are for-profit institutions that allow virtually anyone to join.
The biggest advantage of using a credit union is that they typically offer better interest rates on loans, credit cards, savings accounts, and CDs, compared to traditional banks. However, they also tend to have fewer product offerings. Plus, not everyone can become a member of a credit union.
Credit unions are only open to their members, but these institutions are also owned by their members rather than shareholders. This means the credit union's profits go back to its members rather than to a bank executive's pocket.
How does a credit union work?
Credit unions are only open to their members, but these institutions are also owned by their members rather than shareholders. This means the credit union's profits go back to its members rather than to a bank executive's pocket.
Each credit union defines its membership differently. To become a member of a credit union, you might need to pay a small membership fee or be part of an organization (like the military).
Who can join a credit union?
Each credit union sets its own rules about who can become a member. Some common factors credit unions use to determine who is eligible for membership include:
- Employer: If you work for a certain company, you may be eligible to join the credit union it sponsors.
- Family members: If a close relative is a credit union member, you may be able to join.
- Geographic location: If you live or work in the area where the credit union operates, you might be eligible to join.
- Group membership: If you belong to a labor union, a school, or another institution affiliated with the credit union, you could be eligible to open an account there.
In addition, some credit unions allow virtually anyone to join by paying a small, one-time fee if they don't fit any of the other membership criteria.
If you're interested in joining a credit union, check out its membership criteria on its website so you can see if you're eligible to join. You can also reach out to the credit union directly to ask.
Advantages of credit unions
There are several advantages to banking with a credit union. Here are some of the most important.
Security
Money you put in a credit union is secure, just like money you put into a traditional financial institution. Credit unions take steps to ensure that only you can access your money, and online accounts are encrypted to protect your information.
Funds at credit unions are also insured by the National Credit Union Administration (NCUA). This is similar to the FDIC insurance banks offer. It protects your money up to $250,000 per depositor per account type against credit union failure.
Low fees
Credit unions typically offer lower fees on their loans and banking products than large brick-and-mortar banks. This can make it more affordable to work with a credit union, especially for those who worry about monthly maintenance fees with traditional banks.
Higher APYs
Credit union annual percentage yields (APYs) aren't quite as high as what you'll find with some of the top online banks, but they usually offer better interest rates than what you see with brick-and-mortar institutions. This can help you earn more money on your savings account.
Personal relationship
Credit unions usually operate locally and have great customer service. Many try to form personal relationships with their members. This can be useful when applying for a loan, but it's always nice to have the option to get individualized support from a person who knows your name when you need it.
Disadvantages of credit unions
While credit unions have a lot going for them, they also have their shortcomings.
Small branch and ATM network
Most credit unions operate in a local area. That might not be a problem for you if you typically stay close to home, but if you travel outside of the credit union's service area, you might have trouble getting help when you need it.
ATM networks are also usually limited to the credit union's service area, so if you want to get cash while traveling, you'll have to pay an out-of-network ATM fee to use another bank's ATM.
Smaller variety of products
Credit unions typically have smaller budgets than large banks, and this can limit the number of products they're able to offer to their customers. But this varies from one credit union to the next. Most of them are still able to offer a variety of banking products, including checking accounts, savings accounts, money market accounts, certificates of deposit (CDs), and loans.
Limited membership
As discussed above, credit unions aren't always open to everyone. Even if you want to join, it might not be possible if you aren't a member of an affiliated group. It's best to check this before you get too deep into researching the credit union's offerings, so you don't waste your time trying to apply for a credit union you can't join.
Credit unions don't always have the best online banking tools, and some don't have mobile banking apps at all. An increasing number of institutions seem to be trying to offer these services to their customers, but if it's not available at your credit union yet, you'll have to get comfortable visiting your local branch when you need something.
Is a credit union right for me?
Only you can decide if a credit union is a good home for your money. If you're still not sure, here are a few questions that might help you decide:
- What types of accounts am I looking for?
- Do I prefer to manage my finances on my own or with one-on-one support?
- How often do I travel outside of the area?
If you think a credit union might be a good fit for you, explore a few options in your area. You might also see what's available online. Alliant Credit Union, for example, operates online and has a nationwide ATM network. That might be a good compromise if you're interested in working with a credit union but are concerned about tying yourself down to one place.
