What Is a Credit Union? How Do They Work?

Banking
Updated: 6th Feb 2021
Written by Kim Pinnelli
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Banking
February 6, 2021
Written by Kim Pinnelli

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You have the option to join a credit union, but you wonder if it’s safe. Why would you join a small community financial institution when you could use the large commercial bank down the street?

It’s a valid concern.

Credit unions can be a great way to save money or earn more money if you use them right. Here’s everything you need to know about credit unions and how they work.

What is a Credit Union?

Credit unions are like banks, except the members own them. They operate as not-for-profit institutions, looking out for the members’ best interest. Many people get lower interest rates and fees going through a credit union instead of a bank.

How Do Credit Unions Work?

Most credit unions are open to a select audience. Groups, employers, or certain affiliations are often required. Members sometimes pay a membership fee to join. The members elect the board of directors who makes decisions on behalf of the members.

Because they are non-profit, credit unions use the profits to pay back the members. You may see lower fees, higher interest rates, or other unrelated benefits, such as educational opportunities to help you plan and manage your finances.

What Do Credit Unions Offer Customers?

Because credit unions are member-owned, they offer many more benefits than banks that operate in their shareholders’ interest, not the customers.

Credit unions offer:

  • Voting Rights: Members vote in the board of directors. Each member gets one vote. This ensures the voting isn’t biased if members with more money get more votes than members with less money. The board of directors makes decisions for the credit union, which affects the members’ money.
  • Part Owner: Credit union members are part owners. When you deposit money, you become a part of the credit union. They may use your money to loan it to another member, for example. While this is similar to a bank, only members or part-owners are welcomed.
  • Community Involvement: Credit unions often get involved in local community needs. They sponsor events, educate the community, and help in the area when there’s a need.
  • Deposit Accounts: Like a bank, you can usually open a checking or savings account at a credit union. Each institution has different accounts, so check with your credit union to see your options.
  • Strong Customer Service: Because credit unions serve a specific audience, they can provide more personalized customer service. The credit union staff gets to know each member, which helps with personalized customer service and when approving members for loans or other financial needs. Members aren’t just a number like customers at a bank.
  • Competitive Rates: Their non-profit status allows credit unions to share the profits by offering lower interest rates on loans and higher interest rates on savings accounts, CDs, and money market accounts.
  • Low Fees: Just like the competitive rates, credit unions offer lower fees because they don’t keep the profits. They don’t have to charge unnecessary fees to stay in business or keep the shareholders happy.
  • Shared Branching: Some credit unions work together to provide their members with larger ATM networks and access to their funds. They work in a co-op network that allows shared branching to allow more access outside of their home or work area.
  • Certificate of Deposits: Like banks, credit unions offer CDs or supercharged savings accounts that require you to leave your money for a predetermined length of time. Credit unions offer higher APYs on CDs because of their non-profit status.
  • Loans: Many credit unions offer car loans, mortgages, and personal loans, just like a bank. They may offer faster approvals, lower fees, and lower interest rates, so it’s worth checking out.

How is a Credit Union Different from a Bank?

Credit unions and banks operate similarly except for their business structure. Banks are for-profit, and credit unions are not-for-profit.

Banks operate with the shareholders in mind, and credit unions operate with the members in mind.

Credit unions take the money they have and put it back into the members’ hands. Banks use the money to keep up the profits and share them with the shareholders.

Membership Requirements to Join a Credit Union

Every credit union has different membership requirements, but a common denominator is a group or affiliation you have.

A few examples include:

  • You all work for the same employer
  • You live in a specific geographic area
  • You belong to a specific group or affiliation

Advantages of Credit Unions

  • Personalized service – Credit unions work out of one or two branches, usually. All professionals get to know all members. This allows them to provide tailored service for each member rather than a ‘by the book’ service that doesn’t cater to each person’s needs.
  • Better interest rates – Most credit unions offer higher APYs on deposit accounts and lower APRs on loans.
  • Fewer fees – Most credit unions keep their fees to a minimum to make it more affordable for members to get the financing they need.

Disadvantages of Credit Unions

  • Membership required – Only members may use a credit union. You must be a part of the group or affiliated with a specific organization to join.
  • Not as many products – Credit unions offer great products, but the selection is often less than what banks offer.
  • Fewer branches – Credit unions often have one branch, making it hard to access your funds.

Related: Best Bank Accounts to Open

Credit Union FAQs

Can Anyone Join a Credit Union?

No, you must be a part of the group or affiliation a credit union has, but they are getting more widespread today. For example, you may join a credit union because you live in a specific area or are part of a specific affiliation.

Are Credit Unions Safe?

Yes, like banks credit unions are safe. You can conduct your banking transactions and feel comfortable. Most credit unions do not have advanced technological apps like banks, so most of your transactions are done in person, which may make you feel even safer.

How Are Credit Unions Regulated?

The National Credit Union Administration oversees federally insured credit unions, and each state’s department oversees state insured credit unions.

Are Credit Unions FDIC Insured?

Like banks, credit unions carry insurance, but the National Credit Union Administration insures the accounts rather than FDIC insurance. Like banks, each account is insured up to $250,000.

What is the National Credit Union Administration?

The National Credit Union Administration (NCUA) oversees deposits at federally insured credit unions. They protect the members of the credit union, ensuring that their money is safe.

Are Credit Unions Insured?

Yes, credit unions are insured by the National Credit Union Administration.

Bottom Line: What Is a Credit Union?

A credit union is a member-owned financial institution that looks out for its members. Most people enjoy credit unions for the higher savings rates and lower loan rates and fees.

As a member, you get a say in how the bank operates and the satisfaction of knowing you aren’t paying to keep the shareholders happy since, as a member, you are one of them.

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Kim Pinnelli
Kim Pinnelli
Kim is a personal finance expert with a Bachelor’s degree in Finance from the University of Illinois at Chicago. She has been freelance writing for 13 years for a number of large publications. Kim thoroughly enjoys helping people take charge of their personal finances.