Credit unions can be a great alternative to traditional banking. In many ways, a credit union works exactly like a traditional bank, but its emphasis is on improving the financial well-being of its account holders rather than creating a profit on behalf of its investors. That’s because a credit union is, as the name implies, a union of members. Membership is made up of those who bank with a given credit union. So a credit union looks like a bank, provides the same services as a bank, and ultimately offers the same basic financial products that you might get through a bank, but there is a consequential difference. Unlike a bank, a credit union is not incentivized by profit. While credit unions may not always offer the same conveniences as a well-financed national bank, they do offer numerous advantages from lower fees and borrower interest rates to a core emphasis on customer service.
If you’ve already considered your options and you think you’d rather go with a traditional national bank, make sure you shop wisely. Fees, financial products, customer service quality, and conveniences may vary widely. For some guidance, check out our tips on How to Choose Your First Bank Account.
If you’d like to learn more about credit unions and why this might be a great alternative to opening an account with a national bank, read on…
What is a credit union?
A credit union is a non-profit cooperative alternative to banking that is designed to benefit its account holders. A credit union offers many of the same basic functions as a national bank including an array of savings, checking, and business accounts, home loans, and a traditional range of retirement accounts. As a member of a credit union, when you borrow for items like small business loans or mortgages, you are borrowing from the savings pooled by your fellow members. This differs from a traditional loan which is backed by the bank itself. This unique structure allows the credit union to offer more favorable lending terms to its borrowers.
The other factor that allows for favorable lending terms is the non-profit status of a credit union. With a credit union, any profits earned by the tax-exempt banking institution are returned to the community of account holders by way of reduced fees, lower lending interest rates, and elevated savings interest rates. In other words, every dollar earned by a credit union is used to improve financial outcomes and experiences for the account holder. Of course, that degree of profit can vary widely depending on the size of a credit union and the demographic makeup of the community it serves. Consequently, the array of benefits that a credit union offers to its members may be highly variable.
However, one distinct feature that is common to all credit unions is the nature of membership. With a credit union, account holders are considered members of a cooperative. As members, credit union account holders enjoy an array of protections and benefits not afforded to customers of traditional banks. According to The Balance, “A credit union doesn’t have stockholders, so it works to please its members. This shift from a for-profit to a nonprofit model changes the business focus from generating the most profits possible to creating the best customer service and support experience. Thus, many credit union policies are more customer friendly.”
It also puts the account holder in a position to help shape those customer friendly policies. As we’ll discuss in the section directly below, owning an account with a credit union gives you a direct say in credit union leadership and decision making.
What’s the difference between a credit union and a bank?
The primary difference between a credit union and a bank is that a bank is owned by investors and structured to turn a profit on behalf of those investors whereas a credit union is owned by its account holders and is run as a non-profit cooperative. When you open an account with a bank, you are a customer with no vote in the company’s policies or priorities. When you open an account with a credit union, you are a member, a direct stakeholder, and a voter in board of director elections.
This last difference carries enormous implications. The board of directors is a group of volunteer representatives whose primary goal is to implement the interests of voting members. This is a major distinction from the board of directors of a national bank, which is generally composed of individuals with a vested financial stake in the profitability of their bank, and who make decisions on behalf of investors who also have a vested financial stake in the profitability of a given bank. Banks have a responsibility to their investors and to the goal of creating profit, first and foremost.
Credit unions, by sharp contrast, have a responsibility to their members. And because members typically come from within a shared community, credit unions are also generally more active in their local communities than are banks. According to MyCreditUnion.gov, “Credit unions may provide: financial education and outreach to consumers; in-school credit union branches; and small business needs.”
While most banks do sponsor far-reaching charitable campaigns and causes, credit unions are in a position to focus their energies and resources more locally. As a voting member of a credit union, you have the power to back board members who are dedicated to reinvesting profits into priorities that can advance the whole community.
What are the benefits of choosing a credit union?
The benefits of choosing a credit union may include:
- Lower account fees
- Lower interest rates on loans
- Higher interest rates on savings accounts
- Surcharge-free ATMs
- Better customer service
- Direct policy input as a voting union member
In addition to these basic benefits, credit unions are generally fashioned to make banking accessible to a wide cross-section of community members. A number of benefits are intended to lower the financial threshold for gaining the financial security, safety and protection of banking.
For instance, credit unions make no-fee banking opportunities far more widely available than do traditional banks. According to the Missouri Central Credit Union, “More than 80 percent of credit unions offer free checking accounts, while only about 50 percent of banks do. Since this is the main financial account for most people, free checking accounts are a benefit that nearly everyone can appreciate.”
In addition to no-fee opportunities like checking accounts and the above-mentioned no-free ATM withdrawals, credit unions impose far lower fees for instances like overdrafts and fund transfers. These are fees that national banks typically impose in order to drive up profits. The Balance identifies overdraft surcharges as a major money maker for traditional banks. Without the imperative to create a profit, credit unions impose lower fees and offer greater flexibility in reversing or crediting certain fees. In essence, credit unions impose less restrictive rules, and therefore, impose fewer financial penalties on their account holders.
What are the drawbacks of using a credit union?
There are a few potential drawbacks to choosing a credit union over a national bank, including:
- Fewer branches
- Fewer ATMs
- State-by-state variations in regulatory oversight
- A smaller array of account options, investment products, retirement funds, etc.)
The last of these drawbacks may be consequential, especially when dealing with a smaller credit union. Some credit unions may have a far smaller and less desirable array of financial products. If your goal is to seek investment opportunities through your banking institution, a credit union might not have everything you’re looking for. Not only that, but Bankrate warns that credit unions often commission third-party brokers to serve the investment needs of their members. The fees levied by these third-party brokers are frequently onerous, the financial products are frequently expensive, and the array of investment opportunities is frequently limited.
The other important consideration is your personal need for technological convenience. Today, many bankers justifiably place a premium on the ease of mobile deposits, instant transfers, and digital wallets. Such banking innovations are not always available for credit union members. Bankrate notes that a large percentage of credit unions persist on a relatively small budget. This makes it difficult for credit unions to stay on pace with developments in commercial banking.
According to Bankrate, many credit unions are state-chartered, as opposed to federally chartered. These credit unions are often much smaller, and possess very limited resources. “Their small size means they may not be able to finance expensive technology upgrades,” according to Bankrate. “As a result, some smaller credit unions aren’t able to offer mobile banking apps for your smartphone or mobile deposits, where you can deposit checks just by snapping a picture. Still, most credit unions do offer online banking.”
And in general, technological latency is becoming less and less a drawback for larger, federally chartered credit unions. Larger institutions, often those serving a cross-section of urban communities, have increasingly improved the pace of their technological adoption. Indeed, according to Investopedia, “Today there are fewer differences between the two in terms of convenience, especially if the credit union you’re considering has good online services and is a member of a co-op that provides access to branches and ATMs nationwide.”
That said, it is important to note that there are potentially broad differences in policies and fee structures from one credit union to the next. This is especially true where smaller, state-chartered credit unions are concerned. Remember—community members select their own boards of directors. This means that the policies and priorities of one community-servicing credit union may be quite different from the policies and priorities of another. Bankrate advises prospective members to always read the find print. Gain a full understanding of the fee structure, interest rates, and financial products available to you before choosing a credit union. You may find that you are more compatible with some credit unions than others.
What’s the difference between a state chartered credit union and a federally chartered credit union?
The difference between a state chartered credit union and a federally chartered credit union is that all Federal Credit Union (FCU) entities are regulated and supervised by the National Credit Union Association (NCUA) whereas state credit unions are beholden to regulations imposed by state-specific financial regulators. It’s also important not to confuse federal chartering with federally insurance. According to Investopedia, “Both state and federally chartered credit unions may be federally insured.”
There are benefits and drawbacks to using a state chartered credit union. Among the key benefits, is the potential for a greater interest rate on savings. States aren’t necessarily always aligned with credit limits imposed at the federal level. Your state credit union may therefore be able to offer more favorable savings interest rates than a federal credit union.
It may also be the case that regulators in your state are more intimately familiar with the policy priorities important to your community. This means state credit unions may be governed with more regulatory precision than national credit unions.
The primary drawback of using a state credit union is that many of these entities tend to be smaller in size and therefore carry decidedly more limited resources. The drawbacks described in the section above—technological latency, limited branches, fewer financial products—are more likely to apply to state-based entities. Bankrate warns that “small credit unions usually have limited offerings. They may offer only one type of savings or money market account without tiered interest-rate offerings. The latter would benefit affluent investors with large deposits.”
One other note of importance—not every state has its own regulatory entity for overseeing credit unions. In certain states—Arkansas, Delaware, and Wyoming, for instance—no such agency exists. Therefore all credit unions in these states are federally chartered.
Once again, reading the fine print is important. Before you decide that a credit union is right for you, you’ll need to determine your level of access to one that actually matches your needs. NerdWallet indicates that there are currently well over 5,000 federally insured credit unions serving more than 120 million members. The National Credit Union Administration offers a credit union locator where you can identify a federally insured credit union serving your community.
Now that you know what a credit union is and how it works, it’s up to you to comparison-shop. Compare your local credit union’s fee structures, interest rates, conveniences and product offerings to those provided by several leading national banking chains. Identify your top banking needs and priorities, then choose the entity that best matches them. And if it turns out to be a credit union, make sure you take full advantage of its unique benefits.
By the way, while a good bank is important, it’s also important to stash some cash under your mattress. Well, figuratively speaking anyway. We don’t actually recommend keeping money under your bed, but we do offer Ten Reasons Why You Should Always Keep Cash On Hand.