Credit unions are member-owned organizations that offer traditional banking services.
They’re legally structured to put people before profits. As such, you may be able to earn more money on your savings and pay less interest on loans by letting a local credit union handle your banking needs.
Money expert Clark Howard says he's a big proponent of credit unions: "Because they're owned by the membership, their whole structure is about serving the member instead of gouging the customer."
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What Is a Credit Union?
A credit union is a not-for-profit organization that offers many of the same products and services as a traditional bank.
But by their nature, credit unions exist to serve their members. They often offer more personalized customer service, more favorable terms on loans and none of the “gotcha” fees that big traditional banks have a reputation for imposing.
Although there are a few national credit unions, most are local or regional and require membership. They’re a safe place to bank and they allow you to borrow money at reasonable rates.
Local credit unions may be better for people who want the in-person experience. But there are not any major differences in the products and services that local, regional and national credit unions offer.
Here’s How Credit Unions Work
When you become a member of a credit union, you’re technically buying shares of a cooperative.
In other words, you become part owner of the credit union. And as a part owner, your vote counts. You can help elect a volunteer board of directors and you can have at least some level of influence on the programs the credit union offers.
I’ve seen credit unions described as “cooperative structures” that create a “cycle of mutual assistance.” If that sounds like teamwork to you, it is. The members of the credit union pool money together. One member’s savings account can become another member’s loan with the credit union acting as a facilitator. The difference between this and a regular bank loan? The facilitator isn’t taking a profit-minded cut. There are no investors to please in the middle.
Because credit unions are not-for-profit companies, any income they generate goes toward projects and services that benefit the community and its members. That can take the form of a financial education and literacy program, charitable giving, or putting the products back to use for the members by paying greater interest on savings accounts or offering lower interest on loans.
Although the Federal Deposit Insurance Corporation (FDIC) does not cover credit unions, the National Credit Union Administration (NCUA) provides the same $250,000 in deposit insurance. So no matter what happens, your money is safe.
Clark says just make sure the credit union you choose has NCUA coverage. All federal credit unions are required to be NCUA insured. Most local credit unions are backed by the NCUA, but some may not be.
Credit Unions vs. Banks: Advantages and Disadvantages
If you’re deciding where to open your financial accounts, you may be trying to choose between a credit union and a bank.
Both of them offer safety for your money. You can open a checking account, a savings account and get a loan from either type of institution. Widespread access to ATMs is common for both.
Much like online banks, credit unions usually don’t own national ATM networks. But they usually offer access to ATMs through third-party companies that service multiple credit unions and online banks.
Credit Union Advantages vs. Traditional Banks
Here are some of the ways that credit unions have an advantage over traditional banks:
- Lower interest rates on credit cards and loans. Credit unions are fundamentally structured to serve their members. This is one of the major payoffs. For-profit companies use interest on credit cards and loans to, you know, profit. I get a pre-approved loan from a credit union every time I buy a car because the rates are consistently fantastic compared to other options.
- Higher interest rates on deposits. You may find better interest rates among some of the savings accounts that Clark.com recommends. But credit unions often do better than the national average, beating a lot of traditional banks.
- Fewer fees than traditional banks. There's no need to pay monthly maintenance fees and other charges for the right to maintain a checking or savings account, assuming you're acting responsibly. Credit unions understandably have a better reputation in this department than traditional banks. (Online banks often offer fewer fees than traditional banks as well.)
- More personalized service. A credit union's incentive is to serve its members rather than to profit because the members are the owners. If you like the dynamics of cooperative groups, chances are you'll appreciate the way your local credit union treats you as a customer.
- Not-for-profit organizations don't have to pay federal income taxes on earnings, which is a nice cost saving that gets passed on to members.
- Community involvement. Credit unions offer financial education programs, support charities, have a reputation for catering to the needs of small businesses and sometimes offer in-school branches.
Credit Union Disadvantages vs. Traditional Banks
Here are some disadvantages of credit unions compared to traditional banks:
- Require membership. We'll get deeper into the idea of membership later in this article. But almost all credit unions require a small fee or donation (less than $20) in exchange for membership.
- Offer fewer products. For example, your credit union may offer only a handful of credit card options. Some of the biggest banks sometimes offer more than two-dozen. But credit union proponents would ask you to compare the interest rates.
- Have limited branch locations. Credit unions typically are local. They rarely have large national networks of branch locations. If you move to another state, you may not find a branch near you.
- Tend to feature less innovative tech. Credit unions are not known for cutting-edge banking technology. Often they don't have the funds to create innovative software, integrate with other systems or even produce highly-rated apps.
- Often keep banker's hours. If your credit union is local, it's unlikely that it offers 24/7 customer service.
How to Find a Credit Union
As I mentioned earlier, there are some national credit unions, but the vast majority are local or regional. It’s harder to find information on “best credit unions” for that reason.
However, the NCUA provides an excellent credit union locator tool. I put in my ZIP code in Florida and the site gave me a list of 100 credit unions within 35 miles.
Clark always advises to look at your local options before deciding where to open a bank account.
“For the vast market, I love credit unions for checking accounts,” Clark said, praising them for their customer-first approach.
Once you find a credit union that you want to join, you’ll need to become a member.
How to Become a Credit Union Member
Not long ago, credit union membership required a common bond. That could be achieved in four ways:
1. Employer. Lots of employers sponsor their own credit unions, like the Navy Federal Credit Union for military personnel.
2. Family member. If you're a close relative of a credit union member, often you can become a member as well.
3. Physical location. Many credit unions allow you to become a member if you live, worship or attend school in a specific city or state.
4. Membership in Another Organization. Being a member of a certain church, labor union, homeowner's association or school may qualify you.
These days, many credit unions have relaxed their membership rules. You can often become a member just by making an initial deposit or making a small donation to a charity or interest group.
For example, you can become an Alliant Credit Union member with a $5 donation to the nonprofit Foster Care to Success. If that's too much for you, Alliant will even donate on your behalf. Alliant made our list of the best checking accounts in 2020.
You can become a PenFed Credit Union member by depositing at least $5 to open a savings account. PenFed made our list of the best savings accounts in 2020.
Check the website of your local credit unions to find out their membership requirements.
If you have a lot of money to invest and you’re not living paycheck to paycheck, consider doing your banking at a discount brokerage.
For everyone else, credit unions are usually terrific places to handle your banking needs. Most credit unions offer NCUA coverage, so pick one that has it.
You always want to compare your options when it comes to money. But credit unions usually offer much better deals on loans and can often offer better interest rates on deposits.
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