On the surface, credit unions offer services that are the same as traditional banks. Credit unions have the same checking and savings accounts, and the same investment vehicles (CDs, retirement accounts, money market accounts). But there are some distinct differences between credit unions and traditional banks. The biggest difference is that credit unions are non-profit organizations that are technically owned by their members (meaning anyone who has an account there). Traditional banks are for-profit ventures that are run with the goal of making money for the bank’s shareholders. There are some serious advantages to opting for a credit union instead of a traditional bank.
First, credit unions usually have more favorable interest rates. From savings accounts to CDs to interest-bearing checking accounts, credit unions pay higher interest compared to regular banks. Also, they are more likely to offer useful products to people who are just starting out their savings or investment portfolio. Products like interest-bearing savings accounts with a low minimum balance and CDs that allow you to make multiple deposits per year without a penalty are part of many credit union’s financial menus.
Why the better interest rates? Credit unions are non-profit, so they do not pay taxes to the federal government. That means there is more money to use on day-to-day operations. Also, the shareholders in a credit union are the customers, not some nameless Wall Street tycoons. Profits come back to the credit union’s shareholders/customers in the form of higher yield on their savings or investments.
Also, regular banks can increase their fees in order to increase profits. Customers simply have to pay these fees without any recourse. Credit unions are less likely to charge extra fees since they are not seeking these extra profits for investors, but seeking to maximize the profits of all their customers. Credit unions also offer plenty of free services, such as free checking accounts that do not require a minimum balance. Savings accounts generally have a very low minimum balance (sometimes as low as $10). Credit union customers also enjoy things like fee-free ATM withdrawals if they use ATMs that are in the union’s network.
Credit unions are more attractive that regular banks when it comes to obtaining loans. Credit union customers generally have an easier time getting approval for loans and enjoy lower interest rates than people who obtain loans from a for-profit institution. Credit unions have the same types of loans as other banks: mortgages, car loans, personal loans and small business loans. Many credit unions have rules that state that interest rates cannot exceed a certain level so that the union does not lose its non-profit status. Credit unions are even able to issue credit cards. People who use credit union plastic enjoy lower interest rates and fewer fees. This can be a huge advantage, especially for people struggling to pay off their credit card debt.
Funds kept in a credit union account are protected by government insurance in the same way that they are at for-profit banks. The National Association of Credit Unions (NACU) is a government organization that operates in the same way as the FDIC, the federal insurance program for regular banks.
There are a few negatives to credit unions. Usually, membership is somewhat restricted. Credit unions generally serve a specific demographic, such as state employees or members of a certain organization. The Postal Credit Union (PCU) is one of the country’s larger credit unions. Members are employees of the USPS. Families of credit union customers can also obtain membership. Usually, however, people can find a way into a credit union. Perhaps they can pay a small fee an join a certain organization that is associated with a credit union. Other credit unions allow donors to join. Often, donation requirements are quite low (as low as $10-$50). There are online tools that can help people find the right credit union for their needs.