What Is a Credit Union?
A credit union is a type of financial cooperative that provides traditional banking services. Ranging in size from small, volunteer-only operations to large entities with thousands of participants spanning the country, credit unions can be formed by large corporations, organizations, and other entities for their employees and members.
Credit unions are created, owned, and operated by their members. As such, they are not-for-profit enterprises that are accorded tax-exempt status.
Key Takeaways
- Credit unions are financial cooperatives that provide traditional banking services to their members.
- Credit unions have fewer products than traditional banks, but offer clients access to better rates and more ATM locations.
- They can do so because they are not publicly traded and only need to make enough money to continue daily operations.
- However, credit unions have fewer brick-and-mortar locations than most banks, which can be a drawback for clients who like in-person service.
- Credit unions are exempt from paying corporate income tax on their earnings.
Understanding a Credit Union
Credit unions follow a basic business model. Members pool their money (technically, they are buying shares in the cooperative) to provide loans, demand deposit accounts, and other financial products and services to each other. Any income generated is used to fund projects and services that will benefit the community and the interests of members.
Requirements for Membership
Originally, membership in a credit union was limited to people who shared a common bond. They may have worked in the same industry or for the same company. Or they may have lived in the same community.
However, credit unions have loosened the restrictions on membership and often allow the general public to join.
To do any business with a credit union, you must join it by opening an account there (often for a nominal amount). As soon as you do, you become a member and partial owner.
That means you participate in the union’s affairs. You may vote to determine the board of directors and decisions concerning the union. A member’s voting right is not based on how much money is in their account; each member gets an equal vote.
According to the National Credit Union Administration (NCUA), membership in federally insured credit unions grew to 136.6 million as of March 31, 2023.
Total assets in federally insured credit unions as of March 31, 2023, were $2.21 trillion.
Advantages of Credit Unions vs. Banks
Non-Profit Status
As with banks, the process of making money at credit unions starts by attracting deposits. In this, credit unions have two distinct advantages over banks, both resulting from their status as nonprofit organizations:
- Credit unions are exempt from paying corporate income tax on earnings.
- Credit unions need to generate only enough earnings to fund daily operations. As a result, they can work with narrower operating margins than banks, which are expected by shareholders to increase earnings every quarter.
Better Rates and Fees
The profits that credit unions do make are used to pay members higher interest rates on deposits, and to charge lower fees for services, such as checking accounts and ATM withdrawals. In short, a credit union can save members money on loans, deposit accounts, and savings products.
According to NCUA data as of March 31, 2023, the national average rate for five-year certificates of deposit (CDs) offered by credit unions was 2.66%, compared to an average rate of 1.83% offered by banks.
Money market rates at credit unions were also higher, with an average rate of 0.53% versus the average bank rate of 0.43%.
While these differences sound small, they do add up, giving credit unions a significant advantage over banks when competing for deposits.
Credit unions provide better rates on most mortgages, including 15-year and 30-year fixed mortgages, which could be a good option if you are looking to purchase a home.
Disadvantages of Credit Unions vs. Banks
Fewer Locations
Credit unions have considerably fewer brick-and-mortar locations than most banks, which can be a drawback for clients who like in-person service. Most offer modern services such as online banking and auto-bill pay. Still, the small size of many credit unions can mean a compromise on accessibility.
Lower Tech
Smaller credit unions typically do not have the same technology budget as banks, so their websites and security features are often considerably less advanced. That said, some mid-sized and larger credit unions may offer mobile banking apps that rival those of much bigger, for-profit institutions.
Limited Products and Services
While credit unions offer most of the financial products and services that banks do, they often provide less choice. Bank of America has 20 different credit card options, ranging from rewards cards to student cards, while the Navy Federal Credit Union (NFCU) has only six. The second-largest credit union in the country, the State Employees’ Credit Union (SECU), offers one credit card.
Less Flexibility
With more resources to allocate to customer service and personnel, banks are keeping later and longer hours. You may find them open until 5 p.m. or 6 p.m. on weekdays and often on Saturdays, as well. Credit unions tend to maintain traditional bankers’ business hours (9 a.m. to 3 p.m., Monday through Friday), though the larger ones, such as SECU, have a 24-hour customer service hotline.
Insurance on Credit Union Accounts
The Federal Deposit Insurance Corporation (FDIC) does not cover credit unions. However, the NCUA, established in 1934 and which regulates federally chartered credit unions and most state-chartered credit unions, does provide account protection.
In fact, one of the NCUA’s main responsibilities is to administer the National Credit Union Share Insurance Fund (NCUSIF), which uses federal monies to back up shares (deposits) in all federal credit unions.
The NCUA provides coverage for each individual account, joint account, trust account, retirement account (such as traditional IRAs, Roth IRAs, or Keogh plan accounts), and business account for up to $250,000 per account.
For example, if you have an individual account, a Roth IRA, and a business account at a credit union, your total shares are insured up to $750,000.
You can research credit unions of interest that the NCUA regulates at the NCUA website.
What Benefits Do Credit Unions Offer?
Normally, credit unions offer higher rates on interest-bearing accounts, lower rates on loans, lower fees, and a more personal touch when it comes to customer service.
Can Anyone Join a Credit Union?
Nowadays, you’ll find more credit unions offering membership to all. Some still have specific eligibility requirements, though, so be sure to check out a credit union’s “field of membership” section on its website for details about joining.
How Do I Join a Credit Union?
Once you’ve located a credit union that interests you, you should be able to find membership specifics and an application to join on its website. The application usually requires the kind of personal information related to opening a financial account (which is what you’re doing as part of applying for membership). You’ll then need to make a deposit to fund the account you’ve chosen.
The Bottom Line
Credit unions are significantly smaller in size than most banks and are structured to serve a particular region, industry, or group. And though they may have fewer branches, they can still provide customers ample access to their funds as many credit unions are part of expansive ATM networks.
While credit unions must make enough to cover their operations, any profit beyond that goes back to the members in the form of lower fees and account minimums, higher rates on deposits, and lower borrowing rates.
