What is a credit union?
Credit unions are financial institutions, like banks, except the members own the credit union. They are nonprofit entities that aim to serve their members rather than seeking to earn a profit. Credit unions often offer better savings rates, lower loan rates and reduced fees because of this.
But you must meet certain requirements to join a credit union. The requirements vary depending on how a credit union is organized. Here’s what you need to know if you’re considering becoming a member of a credit union.
- How credit unions compare to banks
- Advantages of credit unions
- Disadvantages of credit unions
- What are the membership requirements to join a credit union?
How credit unions compare to banks
Banks and credit unions work similarly, but with a different main goal. When you open an account and deposit money in a bank, you become a customer. Unfortunately, a bank’s primary obligation is to their shareholders, not their customers.
Banks typically offer lower interest rates on savings and higher interest rates on loans in comparison to credit unions. The larger the difference between the bank’s savings interest rates and loan interest rates gives the bank more room to make a profit. This is a major difference between banks and credit unions.
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Credit unions are unique because they’re member-owned. When you deposit money in a credit union account, you become an owner-member of the credit union. You’re both a customer and an owner. The credit union uses the money that you and other members deposit to make loans to other credit union members, much like a bank.
Since a credit union’s main goal is to serve their members, they take the money that would have been profit and instead use it to help credit union members. Credit unions often do this by offering better rates on savings products and lower interest rates on loan products. Credit unions may also offer lower fees, too.
Advantages of credit unions
Most credit unions offer a more-personalized service experience. A bank may be spread out and not have every decision maker within a single community. Credit unions, on the other hand, may have every decision maker close by, allowing you direct access to the people making decisions about your potential loan or other financial transactions.
Credit unions may offer other benefits, like higher interest rates on checking accounts and savings accounts, than traditional banks. That said, online banks may offer higher interest rates than many credit unions, so they may be worth considering. But if you want to keep your money local, a credit union will likely offer the best rates.
Credit unions usually aim to keep their fees low, too. While credit unions do still charge fees in most cases, they may not have as many types of fees. Additionally, the fees they do charge could be lower than competing banks overall.
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Finally, credit unions typically offer lower interest rates on loans than competing local banks. Whether you’re looking for a personal loan, car loan or mortgage, compare the rates offered by your local credit unions to see if you’re getting the best deal.
Disadvantages of credit unions
While credit unions offer many great services to their members, credit unions aren’t always better than banks. First, you must meet a credit union’s membership requirements before you can become a member. If you don’t meet the requirements, you can’t join the credit union.
Smaller credit unions don’t have the size and budget necessary to offer the same services that many large banks do. And the technology that credit unions use, including apps, may lag behind the technology of large banks. Similarly, credit unions may not offer as many products that big banks can offer.
Finally, most credit unions have a limited number of locations. These locations generally only exist in the communities the credit union serves. You’re usually out of luck if you need to speak with a credit union employee face-to-face when traveling outside of your local area.
What are the membership requirements to join a credit union?
Credit union members must have something in common to join a credit union. Many credit unions require you to work for a certain employer, live in a particular area, be part of a particular group (like a school or a labor union), or have a family member that is already a credit union member to join.
If you don’t meet any of the membership requirements, some credit unions allow you to become a member by joining an organization for a small fee. For instance, you can become a PenFed Credit Union member by joining Voices for America’s Troops or the National Military Family Association. Both organizations charge a one-time-only nonrefundable dues payment of $17.
Now you know the answer to the question “What is a credit union?” You should use this information and carefully consider your needs when evaluating whether a bank or a credit union is a better choice for you.
A large bank may be a better choice if you prefer convenience, flexibility and the latest technology. But credit unions may be the better choice if you’re looking for a more member-focused community institution that generally offers better interest rates and lower fees, and of course, if you qualify for membership.
Remember, you don’t have to choose between a bank and a credit union. You can have accounts at both a bank and a credit union to take advantage of the best of both worlds.