A credit union is a not-for-profit organization that is member-owned and for people who share a common bond, like living in the same community or working in the same industry.
As a member of a credit union, you’ll have access to many of the same products and services you may find at a bank. These may include checking accounts, savings accounts, money market accounts and share certificates (what credit unions call their certificates of deposit).
There are pros and cons of credit unions. They are:
Pros of credit unions
- Profits are returned to members: Members are shareholders, so any profit generated by the credit union goes back to them. If you want to take out a mortgage or any other type of loan, you could be able to lock in a lower rate at a credit union than at a bank. You could also earn higher yields on share certificates or savings accounts.
- Low fees: Unlike banks, credit unions are not-for-profit organizations and they don’t pay federal taxes. As a result, you could be able to score a product that charges fewer fees.
- Individualized service: Generally, credit unions are local or regional. With a credit union, you may be able to enjoy a more individualized experience than you’d receive at a bank.
- Your money is safe: The National Credit Union Share Insurance Fund, operated by the National Credit Union Administration, insures your deposits up to $250,000.
Cons of credit unions
- Must be a member: You can’t step into any credit union and take out a loan or open an account without joining the financial institution first. Since most credit unions are made up of members who share something in common, you’ll have to meet certain eligibility requirements to become a member. Sometimes it’s as simple as depositing $5 into a savings account to become a member.
- Limited accessibility: Credit unions tend to have fewer branches. If you travel often and prefer in-person banking, this may be an issue for you. A credit union may not be near where you live or work either, nor offer a full menu of financial products.
- Online banks may offer higher APYs: You might be able to find a higher APY on a CD or savings account at an online-only bank.
How is a credit union different from a bank?
While banks and credit unions offer many of the same products and services, there are some noteworthy differences between them. Banks are for-profit institutions that must pay taxes. Credit unions, on the other hand, are not-for-profit organizations that don’t pay federal taxes.
Banks are run by shareholders who are trying to maximize profits, while credit unions return all profits to members by offering higher rates on deposit products or charging lower rates on loans.
Banks are open to everyone. You can walk into any bank at any time and access its offerings without joining it. With a credit union, you have to become a member to take advantage of its product and service lineup.
A credit union may be a good option for you if you like the idea of developing a close-knit relationship with a financial institution and wish to surround yourself with people who are similar to you. Being a member can also allow you to save money on fees.