What Is a Credit Union? (2024)

Banking and Loans

ByKevin PaynePublishedUpdated

What Is a Credit Union? (1)

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Most people are familiar with banks, whether it’s a traditional brick-and-mortar bank or online. But if you asked someone what a credit union is, it’s less likely they could give you a proper answer.

Credit unions have been in business in America for more than 110 years, and there are currently more than 123 million people who use them in the U.S.

Credit unions have many similarities to banks, but they also have some key differences, including very different structures and focus. Here’s an in-depth look at credit unions, how they work, the products and services they offer, and the requirements to join.

Credit Union History at a Glance

  • In 1909, St. Mary’s Cooperative Credit Association (Manchester, NH) becomes the first credit union opened in the U.S.
  • President Franklin Delano Roosevelt signed the Federal Credit Union Act in 1934, creating the Federal Credit Union Division
  • Morris Sheppard Federal Credit Union (Texarkana, Texas) becomes the first federally chartered credit union
  • In 1942, the FDIC took over federal supervision of credit unions
  • The National Credit Union Administration (NCUA) is formed in 1970 and becomes the official independent federal agency to charter and supervise federal credit unions
  • As of April 2020, there are more than 5,000 federal credit unions in the U.S.

What Is a Credit Union?

A credit union is a not-for-profit financial organization that exists to serve the needs of its members. On a basic level, credit union members have access to many of the same products and services found at traditional banks.

As with banks, money kept in credit union accounts is federally insured. However, insurnace is provided by the National Credit Union Association (NCUA) rather than by the FDIC. Deposits at all federal credit unions, along with the majority of state-chartered credit unions, are insured up to $250,000 per depositor by the NCUA through the National Credit Union Share Insurance Fund (NCUSIF).

Members of credit unions are also owners, and you must meet their membership requirements to be considered to join. Eligibility requirements differ at each credit union. There are federally chartered and state-chartered credit unions. Credit union members elect a volunteer board of directors to manage the credit union. Each member has one vote.

A credit union serves the best interests of its members, which often includes having better rates and fees than you might see at for-profit banks.

How Do Credit Unions Work?

Credit unions run as non-profit organizations run by their own members (customers) and are overseen by a voluntary board of directors elected by the members.

When you become a credit union member, you also become an owner and have a say in who is on the board. Typically, becoming a member requires opening a savings account through purchasing a share at the credit union. This typically costs between $5 and $25. Members of credit unions usually share a common bond, such as:

  • Where you live or work
  • Employer
  • Family
  • Place of worship
  • Homeowners’ association
  • School
  • Labor union
  • Military affiliation

Membership requirements and restrictions vary with each credit union. There are several credit unions in the U.S. that anyone can join. Alliant Credit Union and Air Force Federal Credit Union, for example, only require a donation to a partner charity to join.

Credit unions provide a cooperative banking environment for consumers — one in which long-term customer relationships are valued. Credit union members look out for each other by pooling their money together to provide deposit accounts, loans, and other financial services to each other. Since they are non-profit organizations and exempt from federal taxes, credit unions invest all of their profits back into their members through better interest rates, lower lending rates, and lower fees.

Differences Between Credit Unions and Banks

Credit unions and banks provide financial solutions to their customers, but that might be one of only a few things they have in common. Here’s a look at the major differences between credit unions and banks.

Profits: Credit unions are not-for-profit organizations and exist to serve their members. They only need to make enough earnings to cover operational costs. Any profits are passed back to members. Banks are for-profit businesses and make decisions based on the best interest of their shareholders.

Membership: Opening an account at a credit union requires membership. Qualifications vary between credit unions, but generally it costs under $25 to join. Banks typically do not require membership.

Tax-Exempt: Credit unions still pay state taxes, but they are exempt from federal taxes. This is another way that they pass along savings to their members.

Fewer Options: Most credit unions offer fewer account choices compared to national banks. For example, Wells Fargo offers five checking accounts, two savings accounts, various CDs, six credit cards, a host of lending solutions, investment and retirement accounts, and business and commercial banking options. You could find similar choices at larger credit unions, but most of the smaller credit unions offer fewer banking solutions than you would find at most banks.

Fewer Locations: Credit unions can’t compete with most banks in terms of the number of national branches or ATMs. Many credit unions create co-ops with other credit unions to provide access to more branches and fee-free ATM networks. However, many credit unions and banks offer online banking and mobile apps so you can bank from anywhere.

Technology: While some credit unions offer online and mobile banking, they are nowhere near what’s available in the banking world. However, credit unions are beginning to close this gap, and a few even offer better solutions than banks.

Leadership: As mentioned before, the members of a credit union vote on a volunteer board of directors, including a chair or president. The board of directors manages the credit union.

Customer Service: Because you are a member of a credit union, customer service is usually excellent and will almost always be with a live person who works in your own community. Banks typically offer sub-par customer service.

Accounts Offered at Credit Unions

Credit unions offer many of the same accounts provided by banks plus some less common bank products. Banks typically offer a more extensive range of accounts than credit unions, but it depends on the specific credit union. Here are some of the accounts you may find at a credit union.

  • Checking accounts
  • Savings accounts
  • Health savings accounts (HSA)
  • Holiday cash club and other club accounts
  • Individual Retirement Accounts (IRAs)
  • Money market accounts
  • 529 plans
  • Coverdell education savings accounts (CESA)
  • Certificates of Deposit (CDs)
  • Custodial accounts
  • Credit cards

Savings accounts are often referred to as share accounts at credit unions. Many credit unions require you to open a share account as a condition of membership. Share accounts and club accounts are the perfect places to build an emergency fund. Credit unions are also a great place to get financing for various purchases due to lower fees and higher interest rates, including:

  • Mortgages
  • Home equity lines of credit (HELOCs)
  • Home refinancing
  • Auto loans
  • Student loans
  • Personal loans

Credit Union Resources

The NCUA has two resources available to help consumers find the right credit union.

  • Credit Union Locator: Locate basic information on local credit unions, including branch locations, drive-thrus, and ATM services.
  • Research a Credit Union: Use this tool if you want to access more detailed information about a specific credit union, including membership type, history, and leadership.

You can also tell if a credit union is federally insured by looking for the official NCUA insurance sign, usually located on a credit union’s website and below teller stations at local branches.

Final Thoughts

What Is a Credit Union? (2)

Credit unions aren’t perfect, but they provide a cost-effective alternative to traditional banks, depending on your needs. If you’re interested in joining a credit union, start by checking with your employer or your current associations — such as your college or church — to see what options are available. Evaluate whether a bank or credit union is right for you. You could even use both and take advantage of the best of both worlds.

What Is a Credit Union? (3)

Kevin Payne

Kevin Payne is a freelance writer specializing in credit cards, student loans, personal finance, and travel. He is a regular contributor to Student Loan Planner, FinanceBuzz, and Millennial Money. His work has also been seen on sites such as Forbes and Credit Karma, and he is the budget and family travel expert behind FamilyMoneyAdventure.com. Learn more about Kevin here.

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What Is a Credit Union? (2024)

FAQs

What is the difference between a credit union and a bank? ›

Banks are typically for-profit entities owned by shareholders who expect to earn dividends. Credit unions, on the other hand, are not-for-profit, member-owned cooperatives that are committed to the financial success of the individuals, families, and communities they serve.

How does a credit union work? ›

A credit union is a financial cooperative that offers members a range of traditional banking services such as savings and loan accounts. With your money saved in a credit union, you and other members pool your savings together to lend to each other; it is run for the benefit of members, rather than as a money-maker.

Is it good or bad to have a credit union? ›

Generally, credit unions are viewed as safer than banks, although deposits at both types of financial institutions are usually insured at the same dollar amounts. The FDIC insures deposits at most banks, and the NCUA insures deposits at most credit unions.

Why do people have credit union? ›

Credit unions operate to promote the well-being of their members. Profits made by credit unions are returned back to members in the form of reduced fees, higher savings rates and lower loan rates.

Why do banks not like credit unions? ›

First, bankers believe it is unfair that credit unions are exempt from federal taxation while the taxes that banks pay represent a significant fraction of their earnings—33 percent last year. Second, bankers believe that credit unions have been allowed to expand far beyond their original purpose.

What is safer a bank or credit union? ›

Just like banks, credit unions are federally insured; however, credit unions are not insured by the Federal Deposit Insurance Corporation (FDIC). Instead, the National Credit Union Administration (NCUA) is the federal insurer of credit unions, making them just as safe as traditional banks.

Do credit unions run your credit score? ›

A bank or credit union may make a soft inquiry on your credit when you open a new checking account to check for a history of fraud. These soft checks do not affect your credit score. However, in some cases, a bank may perform a hard credit check, which does affect your credit score.

What is the main downside to opening an account at a credit union? ›

Credit union disadvantages

Membership may require meeting certain work, residential or occupational requirements. Many typically offer branches only in a limited area or region.

Is it easy to borrow money from a credit union? ›

Eligibility requirements for personal loans from credit unions are less strict than a bank's criteria. In particular, a low credit score may not disqualify you from a loan with a credit union, because a credit union is more likely to take into account your overall financial circ*mstances.

What is a weakness of a credit union? ›

Limited accessibility. Credit unions tend to have fewer branches than traditional banks. A credit union may not be close to where you live or work, which could be a problem unless your credit union is part of a shared branch network and/or a large ATM network such as Allpoint or MoneyPass.

Do credit unions help build credit? ›

While the individual options may differ from one to the next, most credit unions offer custom loan programs designed to help borrowers establish credit for the first time or rebuild damaged credit. Some credit unions use aptly-named “credit builder loans” that function much like secured credit cards.

Can the government take your money from a credit union? ›

Through right of offset, the government allows banks and credit unions to access the savings of their account holders under certain circ*mstances. This is allowed when the consumer misses a debt payment owed to that same financial institution.

Should I put my money in a credit union? ›

What Are the Major Advantages of Credit Unions? Credit unions typically offer lower closing costs for home mortgage loans, and lower rates for lending, particularly with credit card and auto loan interest rates. They also have generally lower fees and higher savings rates for CDs and money market accounts.

Why might a person choose a credit union over a bank? ›

People choose banks primarily because of the convenience of multiple branches across the country, along with better technology. On the flip side, people choose credit unions primarily because of discounted loan rates, higher interest rates and better customer service.

What is the best credit union to join? ›

Choosing the best credit union: Where to begin
Brand nameBest forAPY*
AlliantOverallUp to 3.10%
PenFedRewards credit cardUp to 3%
First Tech Federal Credit UnionLow-interest credit cardUp to 5%
Consumers Credit UnionDeposit account varietyUp to 3%
4 more rows

What are disadvantages of banking with credit unions? ›

Credit unions tend to have fewer branches than traditional banks. A credit union may not be close to where you live or work, which could be a problem unless your credit union is part of a shared branch network and/or a large ATM network such as Allpoint or MoneyPass.

Are credit unions safer than banks during a recession? ›

bank in a recession, the credit union is likely to fare a little better. Both can be hit hard by tough economic conditions, but credit unions were statistically less likely to fail during the Great Recession. But no matter which you go with, you shouldn't worry about losing money.

How do credit unions make money? ›

Any income the credit union generates through interest, fees and loans is then used to fund community projects, reinvest into the organization or provide services that directly benefit members, like paying higher savings interest rates.

What two requirements do you have when choosing a bank or credit union? ›

How to choose the best credit union: 5 things to consider
  • Membership requirements.
  • Range of products and services.
  • Fees and account requirements.
  • Dividends.
  • Customer service and accessibility.
Jun 8, 2023

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