What is a Credit Union?

Definition:

A credit union is a nonprofit that offers financial services — such as checking and savings accounts, loans, and credit cards — and is owned by account holders.

🤔 Understanding a credit union

Credit unions are financial institutions that offer many of the services that banks do, such as checking and savings accounts, loans, and credit cards. What makes them different is that they are owned by the account holders (members) rather than external shareholders. Everyone who holds an account owns a share in the credit union and gets a vote in how it operates. Credit unions are nonprofits overseen by a voluntary board that its members elect. Community ownership means credit unions can sometimes offer lower fees, higher interest rates, and more personalized service than do traditional banks. On the flip side, they often have fewer locations and products and may lack up-to-date technology. While banks serve the general public, membership in credit unions is restricted based on your employer, region, or affiliation with a certain group. However, some restrictions are so broad that in reality anyone can join.

Example

Let’s say Sally wants to open a savings account, so she visits the local branch of a national bank. When she looks at the account agreement, she notices that the account has high minimum balance requirements and monthly fees. These fees give the bank a way to produce revenue for its shareholders.

Sally decides to go to her local credit union instead. They offer her what is called a share account. It works just like a savings account but also gives her a share in the credit union’s ownership and a vote in its affairs. The share account has a lower minimum balance requirement, lower fees, and a higher interest rate. The credit union can offer these benefits because it doesn’t have to worry about making a profit for external shareholders.

Takeaway

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 an equal say in what happens to it. Together, the group hires a gardener to care for their plants (credit union staff). Some members volunteer to oversee the garden as a whole (voluntary board of directors.) Later, everyone benefits from the harvest.

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What is a credit union?

Credit unions are financial institutions that are in some ways similar to banks. They offer checking accounts, savings accounts, certificates of deposit (CDs), loans, credit cards, and other financial products. What makes them different from a bank 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 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, not members, who don’t have any say in how the institution is run. Banks are typically for-profit and open to the general public. They are overseen by boards that are accountable to the bank’s shareholders, not its customers. The Federal Deposit Insurance Corporation, an independent government agency, protects deposits up to $250,000 — per account — in case a bank fails.

Why do people use credit unions?

Some people choose a credit union simply because it’s convenient. If a credit union operates many branches and ATMs in your area, it might be the most accessible financial institution. The unique ownership structure of credit unions is another reason many people prefer to work with them. Since credit unions are member-owned, they often offer lower rates on loans and credit cards, and higher ones on checking or savings accounts, than traditional banks. It’s also sometimes easier to qualify for a loan or credit card with a credit union if you have trouble 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 also offer more personalized customer service. Some people also prefer to work with credit unions because supporting a local, non-profit institution, as opposed to a large corporation, aligns with their values.

How do credit unions work?

For the most part, credit unions work just like 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 checking and savings accounts “share accounts” to signify that they give you an ownership share in the institution.

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.

What are the membership requirements?

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.

What are the advantages and disadvantages of credit unions?

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 have to work in the interest of their account holders rather than earning a profit for other shareholders. That means more money can be returned to depositors or borrowers. If you’re someone who values supporting community institutions, rather than corporations, working with a credit union may be the more fulfilling. If you don’t have a great credit score, a credit union might also be able to offer you better rates than a traditional bank.

The biggest disadvantage of credit unions is that they tend to be smaller than banks. You can open an account at a major bank, and you’ll have little trouble finding an ATM or branch anywhere 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 your account. Credit unions may also lack the latest technology and often don’t offer as many services and products as banks do, such as brokerage accounts. Some banks offer rates that are more than competitive with credit unions, so you may want to do some research and compare.

What to know before joining a credit union

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 don’t want to go out of your way to access your accounts.

To join a credit union, 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 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.

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