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Credit Unions are non-profit organizations that feature many of the same financial products and services as do large commercial banks, but often offer higher savings rates and lower loan rates while charging lower fees and requiring lower deposit balances.
Therefore, it is not uncommon to find checking and savings accounts, CDs, lines of credit, mortgages, personal loans, auto loans, credit cards and debit cards available at your local community credit union – along with the convenience of ATMs and mobile banking – all at comparably favorable pricing than would be found at a large national bank.
So, is it a good idea to conduct your personal financial business through a credit union? What are the advantages and disadvantages of doing business with a credit union? Let’s take a closer look.
Credit Unions Explained
As of September 2019, there were over 6,000 credit unions located within the United States, with all of them including some notable differences from commercial banks.
For starters, at credit unions, all customers with accounts are considered members and owners who elect their board of directors in a community oriented one-person-per-vote (regardless of account size) system that emphasizes the mission of “serve people – not profit.”
The elected board of directors is responsible for overseeing all of the services offered by the credit union, and its members receive no compensation.
Meantime, credit unions, because of their non-profit status, are largely exempt from federal and state taxation. This tax-exempt status is what allows credit unions to often offer more favorable terms on financial products and services than those available through for-profit commercial national banks.
The lower pricing available through credit unions, in turn, also allows them to better cater to the specific needs of its community members, often providing greater flexibility when granting loans to individuals and small businesses that require financing.
Types of Credit Unions
There are a number of different types of credit unions, and since they each have their own eligibility requirements for prospective members, not everyone is eligible to join every credit union. For example, Community Credit Unions serve residents of a specific city or county, and all that is required to join is proof of residence of the region.
However, individuals who do not live in the community that the credit union serves are ineligible to join. College Credit Unions serve students, alumni, faculty and staff. Group Credit Unions serve fraternal organizations and churches, often supporting groups that back specific social causes. Employer Credit Unions serve specific professions and industries, including teachers, firefighters and certain categories of government employees.
Military Credit Unions serve veterans, military members and their families. Federal Credit Unions are probably the least restrictive of all, requiring only that its members be U.S. citizens over the age of eighteen.
Advantages of Credit Unions
This chart from June 2019 comparing average savings, deposits and loan rates compiled by S&P Market Intelligence demonstrates across the board advantages of credit unions over commercial banks.
It compares savings rates on CDs of varying lengths, interest rates charged on credit cards, as well as those attached to fixed-rate mortgages of varying duration, adjustable rate mortgages of varying duration, three-year unsecured fixed rate loans, used car loans and new car loans.
This chart says it all – it just makes plain financial sense to become a member of a credit union in order to save money when borrowing or saving! Meantime, most credit unions also charge lower fees on ATM transactions and overdrafts, require almost no minimum balance on checking and savings accounts (as low as $10 in many cases) and generally have considerably less strict loan qualifications.
To top it all off, customer service is often more personal and effective than that offered at national commercial banks, and security is just as strong – the National Credit Union Administration (NCUA), like the FDIC, insures account deposits up to $250,000 and is backed by the full faith and credit of the U.S. government.
Disadvantages of Credit Unions
Although credit unions are generally less expensive than large national banks while offering more flexible, personalized service to the communities they serve, they are not without their disadvantages. For starters, membership to specific credit unions is limited according to stipulated guidelines – though it isn’t altogether that difficult for someone to find a credit union with guidelines that can be met.
Still, members should not expect the wide range of checking and savings account options that can be found at large national banks and shouldn’t be surprised when choices are few.
Meantime, making deposits and withdrawals to accounts with a credit union can prove inconvenient – as many credit unions have only a limited number of branches and may not include a wide network of ATMs.
Furthermore, some smaller and older credit unions may repel younger customers, given that they may lack the technological resources to allow for online and mobile banking.
Finally, if you enjoy earning “cash-back” or airline miles when using your credit card, credit unions may not be the place for you – as the vast majority of credit cards issued through credit unions will not offer participation in rewards programs.
About The Author: Steven Brachman
Steven Brachman is the lead content provider for UnitedSettlement.com. A graduate of the University of Michigan with a B.A. in Economics, Steven spent several years as a registered representative in the securities industry before moving on to equity research and trading. He is also an experienced test-prep professional and admissions consultant to aspiring graduate business school students. In his spare time, Steven enjoys writing, reading, travel, music and fantasy sports.