What is a credit union and how do they work?

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Whether you like or dislike big banks, knowing there are other options available can be helpful. Credit unions may just be the alternative that you’re searching for.

Here, we’ve outlined what a credit union is, how credit unions work, how they differ from big banks and how using one can help your credit. By the end of this article, you may know whether a credit union or a bank is best suited to your financial needs.

What is a credit union?

A credit union is a nonprofit financial institution that’s similar to a bank but owned and operated by its members. This means the credit union prioritizes members’ interests over profits. The members create a pool of money to provide loans and mortgages. As a result, one member’s savings essentially become another member’s loan.

Because credit unions are nonprofit organizations, their business motivations aren’t driven by incentives to charge customers more. Additionally, due to their not-for-profit setup, credit unions are also tax-exempt.

How do credit unions work vs. banks?

The primary difference between banks and credit unions is the company’s ownership. Shareholders own banks, and increasing profits is usually their primary incentive. Credit unions are owned by their members, so the members have a say in leadership. As owners, all members can vote on a volunteer board of directors.

Banks and credit unions offer similar services, so you can open checking and savings accounts and apply for loans and credit cards at both. However, because members are the owners of credit unions, your local credit union may also provide you with a more personalized service experience.

Are credit unions safer than banks?

Some people hesitate to use credit unions because they think there’s a bigger risk of them shutting down. It’s common to have concerns about what will happen should your financial institution fail, but rest assured that both banks and credit unions have insurance that will protect your money. Just as banks have the Federal Deposit Insurance Corporation (FDIC) offering up to $250,000 of insurance per depositor per institution, credit unions have a similar safety net.

The National Credit Union Administration (NCUA) insures members’ accounts up to $250,000 per member per insured credit union for each ownership category. That means you’re covered if you have less than $250,000 at a credit union. If you have more than that, you may still be covered depending on how your accounts are organized. You can use the NCUA’s Share Insurance Estimator for information that applies to you specifically.

Both types of insurance are backed by the full faith and credit of the U.S. Government. This means that if funds available to the FDIC or NCUA get wiped out, the government agrees to cover the amount owed to you.

The benefits of credit unions

Credit unions feel more like communities because of their members’ shared interests. This is especially beneficial for small businesses and individuals who want to have a say in how their financial institution is run.

There are many benefits to credit unions, including:

• Extra funds are used for your benefit. While there’s less pressure to increase profits, any excess funds can offer members affordable loans and lower interest rates.
• They may provide financial counsel. Credit unions have fewer members, so they can offer financial counseling and education. You can check with the credit union you’re considering to see if any employees are designated Certified Credit Union Financial counselors or if they’ve partnered with local organizations to offer this service.
• You get a more personalized experience. Credit unions have more of a connection to their members, so the experience is more personalized. Since credit unions are hyper-local, you’re more likely to reach a decision-maker if you need to discuss your loan application or financial transaction.
• They offer better rates on accounts. Without the need to pay shareholders, a credit union’s profits are returned to members through lower fees and higher savings rates. They can even pay dividends to members. Even when the differences in fees and rates are minor, they can add up to a significant advantage for members.
• Credit unions offer shared branching. This means you can use an ATM or go into a branch of another credit union with no fees. Your home credit union just needs to be part of the same shared branching network as the credit union you intend to use.
• They have easier qualifications. Credit unions have more relaxed loan and credit card requirements than traditional banks. If you have poor credit, you may have an easier time securing an approval with a credit union.

The drawbacks of credit unions

While credit unions have many positives, there are also some drawbacks any potential member should be aware of:

• There may be specific qualifications for membership. Credit unions will often require a common bond, such as an employer, geographic location or membership in a group like a place of worship, homeowner’s association or labor union. You may have to meet these qualifications before you’re able to join.
• They may offer higher rates. Not all credit unions offer lower rates and fees than banks. You should first do some comparison shopping.
• There are fewer perks with a credit union credit card. In terms of credit cards, you likely won’t be able to earn the same amount of cash back, airline miles or points with a credit union’s card. You may not want to make the switch if you’re already racking up points and miles with your current bank’s card.
• Funds may be limited. Since deposits from other members serve as the source of funding for loans, credit unions may have limited funding and not offer all the services you need.
• They may offer fewer services and features. Due to their smaller size, credit unions may not have as many features as banks. For example, credit unions may not have mobile banking apps or use other technologies.
• They may have fewer locations. Banks are often larger in scale and can afford to fund more brick-and-mortar locations compared to credit unions. If you move, you may find visiting your nearest credit union branch challenging.