What is a Credit Union?

A credit union is like a community garden…

A group of people own a small plot of land together (the credit union), and everyone brings their own seeds (cash deposits). Membership in the garden is restricted to a certain group — in this case, people who live in the neighborhood. Everyone who plants seeds, regardless of how many, has equal ownership in the garden and thus an equal say in what happens to it. Together, the group hires a gardener (credit union staff) to care for their plants. Some members volunteer to oversee the garden as a whole (voluntary board of directors.) Later, everyone benefits from the harvest.

Credit unions are financial institutions that are similar to banks. They offer checking accounts, savings accounts, certificates of deposit (CDs), loans, credit cards, and other financial products. What makes credit unions different banks is their ownership structure.

Credit unions are nonprofit organizations that are owned and controlled by their members. You often hear savings accounts at credit unions called “share accounts,” since opening one entitles you to become a member and to share in the ownership of the credit union. Typically, every account holder gets a single share and a single vote, regardless of how much he or she deposits. A credit union’s board of directors consists of volunteers elected by members. Credit unions are usually open to people who work for a given employer, live in a certain region, or are affiliated with a certain group, such as a church. The National Credit Union Share Insurance Fund protects deposits of up to $250,000 per institution in case a credit union fails.

Banks, by contrast, are typically owned by individuals or institutions that are not necessarily clients of the bank. They serve customers, who don’t have any say in how the bank is run. Banks are typically for-profit and open to the general public. They’re overseen by boards that are accountable to the bank’s shareholders. The Federal Deposit Insurance Corporation, an independent government agency, protects deposits up to $250,000 — per account — in case a bank fails.

Some people may choose a credit union because they believe it’s convenient. If a credit union operates many branches and ATMs in your area, it can be an accessible financial institution. The unique ownership structure of credit unions is another reason people may prefer to work with them. Since credit unions are member-owned, they often offer lower interest rates on loans and credit cards, and higher ones on checking or savings accounts, compared to traditional banks. It’s also sometimes easier to qualify for a loan or credit card with a credit union if you have troublesome spots in your financial history, since it may be more willing to evaluate individuals on a case-by-case basis. Since credit unions are tied to a community, they may offer more personalized customer service. Some people might prefer to use a credit unions because supporting a local, non-profit organization aligns with their values.

For the most part, credit unions work similarly to the way banks do. They offer similar services, such as checking and savings accounts, mortgages, personal loans, credit cards, and more. However, the exact names of the accounts might differ. For example, many credit unions call their equivalents to checking and savings accounts “share accounts” to signify that they give members an ownership share in the organization.

A significant difference between credit unions and banks is that only members of a credit union can use its services. Federal regulations require credit unions to restrict their membership, so you must meet some requirements to join. For example, some credit unions are only for employees of specific companies. These restrictions go back to the emergence of credit unions in the 1920s. The idea was that small groups of people should be able to create nonprofits that provide them with affordable financial services tailored to them.

Some credit unions restrict membership heavily, while others have broader requirements.

One example of a credit union with narrow membership requirements is the Harvard University Employees Credit Union. Only students, staff, faculty, alumni, and affiliates of Harvard and its partner organizations are eligible. If you don’t attend or work for the university or an affiliate, there’s no way for you to join. This allows the credit union to focus its efforts on a very specific population.

The NASA Federal Credit Union is an example of an institution with looser eligibility requirements. You can join if you work for, or retired from, the National Academy of Sciences. You can also join if you work for, or belong to, one of 900 partner companies and groups, including SpaceX and J&J Auto Repair. You’re also eligible if a relative belongs to the credit union. If you don’t meet any of those requirements, you can still become eligible by joining a non-profit called the National Space Society. The credit union even gives potential members free one-year memberships to the organization. In essence, any member of the public can join.

The primary advantage of working with credit unions is that they sometimes offer better customer service than banks, along with lower fees and better interest rates. Credit unions can offer these perks because, as member-owned institutions, they strive to work in the interest of account holders rather than external shareholders. That means more money can be returned to depositors or borrowers. If you’re someone who values community institutions, working with a credit union may be the more fulfilling route.

The biggest disadvantage of credit unions is that they tend to be smaller than banks. If you open an account at a major bank, you are likely to have little trouble finding an ATM or branch in the United States. Most credit unions are local institutions, with only a few branches and ATMs in the area, which can make it more difficult to access branches or ATMs. Credit unions may also lack the latest technology and often don’t offer as many services and products as banks do. You may want to do some research to figure out which organization is right for you.

Before you join a credit union, you may want to compare its offerings to those of other financial institutions. It may be worthwhile to ensure that the credit union offers the products you want at competitive rates and charges acceptable fees. You should also know the membership requirements and make sure you can meet them. Finally, you may want to check that the credit union has branches and ATMs in the areas you visit often — You probably don’t want to go out of your way to access your accounts.

To join a credit union, you may start by filling out a form to prove your eligibility and become a member. You’ll have to open an account and make a small deposit to confirm your membership. You can generally do this either online, or in person at a branch. Typically, you’ll have to provide some identifying information, like your Social Security Number or a government ID, and proof of eligibility. You’ll also need some way to fund the account, like cash to deposit or details for the bank account from which you want to transfer funds. Once this is done, you can start opening other accounts or applying for loans.