Credit Union – Financial Smarts Glossary

Credit Union
Credit unions are like banks, but they don’t make money from their members. They’re known for helping people save money, and offering better options for borrowing. Unlike banks, which anyone can join, credit unions have requirements to become a member. Usually people are eligible to join based on where they work, where they live, their church, or their college.

What is a Credit Union?

A credit union is a banking institution very similar to a traditional bank. The primary difference is that a credit union is a not-for-profit institution, which generally means lower fees and better rates on the loans they issue. Credit unions are locally-based and member-owned, which means they have different requirements for clients than banks.(1)

What are the differences between a bank and a credit union?

The main difference between banks and credit unions is that banks are for-profit institutions while credit unions are not-for-profits. For-profit institutions have the ultimate goal of maximizing their profit, which they do by making money from their customers. Not-for-profits have a different goal. They seek to provide a public service to the community at large.

As such, credit unions generally have lower fees, lower interest rates on loans and higher interest rates on savings accounts. Any profits that a credit union makes from their banking and lending activities are funneled back into lower fees and rates for their members. With a bank, those profits would likely be paid out as a dividend to the company’s shareholders.

What are the benefits of using a credit union?

Using a credit union will probably mean that you pay less to use your checking and savings account. You will probably also be able to get personal loans from them that come with better interest rates than what you would get from a traditional bank. Since credit unions are also locally-based, you will likely have a more positive customer service experience.

What are the drawbacks of using a credit union?

Well, first you have to find one that you are eligible to join.

With most banks, you just have to prove a baseline of credit-worthiness in order to open an account. With a credit union, you probably have to meet some other requirements as well. You might be able to qualify depending on where you work, where you live, what groups you belong to or where you go to school. It all depends on what the credit union requires.

If you travel a lot — especially overseas — a credit union probably isn’t a good fit. Most large multinational banks have locations across the country and easy procedures to allow you access to your funds while overseas. The majority of credit unions only have locations in the region that they cover and fewer ways to let you access funds overseas without incurring fees.

Lastly, credit unions oftentimes do not have as many technological perks as big banks do. (Maximizing profits also means more profits to funnel into Research and Development.) So if you are someone who loves taking a photo on your smartphone of a check and using that photo to make a deposit, a credit union probably isn’t going to be a good fit.(2)

Should I use a bank or a credit union?

Like with most things, it depends. If the benefits of less expensive banking outweigh the costs of less convenient technology and limited regional scope, a credit union will be a good fit. But if you travel frequently and need the ease and convenience that big banking institutions can offer, then that would be the best choice. It’s always good to see what credit unions you would be eligible for and compare those to the banks that are most convenient. Don’t compare generalities. Compare specifics.

References:

  1. “What is a Credit Union?” MyCreditUnion.gov. Accessed March 17, 2016. https://www.mycreditunion.gov/about-credit-unions/pages/how-is-a-credit-union-different-than-a-bank.aspx
  2. Goldstein, Devan. “Credit Unions vs. Banks.” NerdWallet.com. Accessed March 17, 2016. https://www.nerdwallet.com/blog/banking/credit-unions-vs-banks/