What is a Credit Union?

March 10, 2019

credit union

A credit union is a non-profit organization that is owned by its members and serves their best interests. In terms of services offered, it is similar to other financial institutions: you can open a checking or savings account, pay bills or apply for a loan. Since credit unions aren’t seeking to earn a profit, the potential profit is funneled towards members by way of lower interest rates, higher savings rates and reduced fees.

We’ve outlined how a credit union works, how you can join one, and how it can help your credit. Read on to see all of the information you need to help you decide whether a credit union or a bank is best suited for your financial needs.

How Does a Credit Union Work?

A credit union is owned and operated by its members. The members create a pool of money that can be used as the source for loans and mortgages. This means that one member’s savings essentially become another member’s loan. Thanks to this cooperative structure, members mutually help each other reach their financial goals.

What’s the Difference Between a Credit Union and a Bank?

The primary difference between a credit union and a bank is ownership. Credit unions are owned by its members, and therefore, the members have a say in leadership. As owners, all members have the right to vote on a volunteer board of directors. In contrast, banks are owned by investors. The bank’s profits are not seen by account holders, but go to shareholders who receive a quarterly dividend payment.

Since credit unions are non-profit institutions, they don’t have to pay the same taxes as banks. Excess earnings are then used to offer members better financial products. It’s important to note that credit unions are similar to banks in that they must make sound financial decisions, earn revenue and pay salaries.

credit union vs. bank

You may be justifiably concerned about the safety of their deposits, but rest assured that both banks and credit unions have insurance that will protect you in the event the institution fails. Just as the Federal Deposit Insurance Corporation (FDIC) offers up to $250,000 of insurance per depositor per institution, credit unions have a similar safety net in place.

The National Credit Union Administration (NCUA) insures members’ accounts up to $250,000 per member-owner, per insured credit union for each ownership category. That means that if you have less than $250,000 at a credit union, you are covered. 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 United States government.” This means that if the funds available to the FDIC or NCUA are wiped out, the government agrees to fund the remainder owed you.

At a credit union, there’s a decent chance that you can speak with a decision maker who will personally review your credit report and your personal situation. You may also be able to submit a personal letter along with your application. A long-term relationship with a credit union can improve your chances for being approved for a loan even further. If you have a history of managing your accounts well, a credit union officer is more likely to overlook a blemish in your past.

At a big bank, there are no exceptions if your credit score is too low and a computer will decide everything. A community bank or small local bank may be able to offer the personalized experience of a credit union, but they are not owned and controlled by the members who use their services. You also won’t benefit from any profits the bank makes.

pros of credit union

Pros of a Credit Union

The shared interests of members lead credit unions to offer a community feel, making it 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:

  • Extra funds are used for your benefit. While there is less pressure to increase profits, any excess funds can be used to offer members affordable loans and lower interest rates.
  • May offer financial counsel. Credit unions have fewer members, so they can more easily offer financial counseling and education. Roy Bergengren, pioneer of the US credit union movement, once said, “The most important service of the credit union is the education of its members in the management and control of their own money.” You can check with the credit union you’re considering to see if any employees are a designated Certified Credit Union Financial Counselor, or if they have partnered with any local organizations to offer this service.
  • More personalized experience. Credit unions have more of a connection to their members so the experience is more personalized. You are also more likely to reach a decision maker if you need to discuss your loan application or financial transaction since credit unions are hyper-local.
  • Offer better rates on accounts. Without the need to pay shareholders, a credit union’s profits are returned to members in the form of lower fees and higher savings rates. Dividends can even be paid back to members. Even when the differences in fees and rates are small, they can add up to a big advantage for members.
  • Credit unions offer shared branching. This means that 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 shared branching network as the credit union you intend to use. This is ideal for making transactions when traveling.

Cons of a Credit Union

Credit unions, despite their perks, are not for everyone. Here are a few downsides you may wish to consider before joining a credit union.

  • Specific qualifications for membership. Credit unions are typically linked by 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). So, you may have to meet these qualifications before you’re able to join.
  • Higher rates. Not all credit unions offer lower rates and fees than banks. You should first do some comparison shopping.
  • No perks from 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. If you are already racking up points and miles with your current bank’s card, you may not want to make the switch.
  • Funds may be limited. Since deposits from other members serve as the source of funding for loans, credit unions may have limited funding and may not be able to offer all the services you need.
cons of credit union

Despite their non-profit status, banks are not set up as charities. Credit unions can only assist their members in achieving financial well-being by being profitable. This means that they need to be competitive with other financial institutions, so joining a credit union does not guarantee you a loan or mortgage.

Most credit unions will have the following requirements for credit approval:

  • Stable employment - Credit unions look to see if you’ve held the same job for a certain period of time, most likely a year.
  • Low debt-to-income ratio - Credit unions look at the total amount of debt you have and whether you can afford to make the monthly payments on all your debts.
  • Creditworthiness - Just as with banks, a credit union will carefully consider an applicant’s credit before making a decision. Your credit history is used to judge whether you have repaid loans you have previously borrowed. Rebuilding your credit can be crucial, as better credit scores can translate into lower loan fees.

A decision maker at a credit union may be able to hear your side of the story and take it into consideration, but your best option is to work towards improving your credit score.

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Your credit history is used to judge whether you have repaid loans you have previously borrowed. Rebuilding your credit can be crucial...Your best option is to work towards improving your credit score.

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