A credit union is a type of financial cooperative that provides traditional banking services. Ranging in size from small, volunteer-only operations to large entities with thousands of participants spanning the country, credit unions can be formed by large corporations, organizations, and other entities for their employees and members.
Credit unions are created, owned, and operated by their members. As such, they are not-for-profit enterprises that are accorded tax-exempt status.
Key Takeaways
- Credit unions are financial cooperatives that offer traditional banking services to their members.
- They provide fewer products than traditional banks but deliver better rates and access to more ATM locations.
- Operating as not-for-profit entities, they must earn only enough to cover daily operations.
- One downside could be fewer brick-and-mortar locations compared to banks, affecting in-person service convenience.
- Benefiting from a tax-exempt status, credit unions are exempt from paying corporate income tax on earnings.
Understanding a Credit Union: Empower Your Finances
Credit unions follow a simple yet impactful business model. Members pool their money (technically, this involves buying shares in the cooperative) to provide loans, deposit accounts, and other financial products and services to one another. Any income generated is funneled back to fund projects and services that benefit the community and the interests of the members.
Requirements for Membership
Initially, membership in a credit union was limited to people sharing a common bond, such as working in the same industry or company, or living in the same community.
However, modern credit unions have eased these restrictions, frequently allowing the general public to join.
To do any business with a credit union, you must join by opening an account (typically for a nominal amount), making you a member and partial owner.
This membership means you get to partake in the union’s affairs, voting on electing the board of directors and other major decisions. Voting rights are equal for all members, regardless of the amount in their account.
As of March 31, 2023, membership in federally insured credit unions had grown to 136.6 million, with total assets amounting to $2.21 trillion.
Credit Unions vs. Banks: Why Choose a Credit Union?
Non-Profit Status
Similar to banks, credit unions engage in making money by attracting deposits. However, their non-profit status grants them distinct advantages:
- Exemption from corporate income tax on earnings.
- The necessity to generate only sufficient earnings to fund daily operations, allowing for narrower operating margins compared to banks.
Better Rates and Fees
Credit unions use their profits to pay higher interest rates on deposits, and charge lower fees for services like checking accounts and ATM withdrawals. These advantages save members money on loans, deposit accounts, and savings products. As of March 31, 2023, credit unions offered competitive rates on five-year CDs and money market rates that often surpass those of traditional banks.
Embrace Potential Challenges: Realities of Credit Union Membership
Fewer Locations, More Local Service
One drawback of credit unions is the limited number of physical branches compared to traditional banks, impacting those preferring in-person service. Despite this, most credit unions offer modern services like online banking and auto bill pay, though the small size can sometimes affect accessibility.
Technological Constraints
Smaller credit unions may have less advanced technology and security features due to restricted budgets. However, larger credit unions often provide competitive mobile banking apps, equating the services of much bigger, for-profit institutions.
Limited Range of Products
While credit unions generally provide the necessary financial products and services, options can be limited compared to traditional banks. For example, Bank of America offers 20 different credit card options whereas some credit unions may offer significantly fewer.
Operational Hours and Flexibility
Banks often extend operational hours, staying open later on weekdays and offering Saturday service. Credit unions, on the other hand, maintain more traditional hours, though larger ones may offer extended customer service like SECU’s 24-hour hotline.
Insurance on Credit Union Accounts: Safety First
The Federal Deposit Insurance Corporation (FDIC) does not cover credit unions. However, the National Credit Union Administration (NCUA), established in 1934, provides account protections for federally chartered and most state-chartered credit unions through the National Credit Union Share Insurance Fund (NCUSIF). This offers coverage up to $250,000 per account, granting peace of mind across various types of accounts.
FAQ: Quick Information on Credit Unions
What Benefits Do Credit Unions Offer?
Typically, credit unions offer higher rates on interest-bearing accounts, lower rates on loans, fewer fees, and a personalized touch in customer service.
Can Anyone Join a Credit Union?
These days, many credit unions are welcoming the general public, although some still have specific eligibility requirements outlined in their “field of membership” section on their website.
How Do I Join a Credit Union?
Once you’ve identified a credit union that interests you, membership details and an application are usually available on its website. You’ll need to provide the necessary personal information to open a financial account, followed by a deposit to fund your account.
The Bottom Line: The Choice is Yours
Credit unions may be smaller than most banks and structured to serve particular regions, industries, or groups. Despite fewer branches, many credit unions participate in extensive ATM networks, offering ample access to funds. Operating for the members’ benefit, profits are redirected towards reduced fees, higher deposit rates, and lower borrowing costs, ultimately focusing on community-centric financial growth.
Related Terms: banks, savings accounts, interest rates, financial services, loans.
References
- National Credit Union Administration. “Quarterly Credit Union Data Summary 2023 Q1”, Page 6.
- National Credit Union Administration. “Credit Union and Bank Rates 2023 Q1”.
- Bank of America. “Credit Cards”.
- Navy Federal Credit Union. “Credit Cards”.
- State Employees’ Credit Union. “Visa Credit Card”.
- MX. “Biggest US Credit Unions by Asset Size (2023)”.
- National Credit Union Administration. “How Your Accounts Are Federally Insured”.
