What is a Credit Union? A Full Guide
What is a Credit Union?
A credit union is a non-profit, member-owned financial institution. Created and operated by members, profits are shared amongst the owners. Consequently, credit unions often offer better rates, regarding loans, fees, and savings.
In the United States, there are approximately 5,757 credit unions with 104 million members. This makes up around 45.4 percent of the economically active population.
What is the Difference Between a Credit Union and a Bank?
The most significant difference between credit unions and banks is that credit unions are non-profit institutions, whereas banks are for-profit.
Banks are publicly traded or privately owned, meaning that when you open a bank account, you become a customer of that bank. Banks aim to serve the shareholder rather than the customer. As such, banks offer lower interest rates on savings and higher interest rates on loans.
In comparison, credit unions are non-profit and member-owned. If you deposit money into a credit union account, you become an owner as well as a customer. This money is then used to make loans to other credit union members at more attractive rates. Credit unions aim to serve their members rather than making a profit, often through providing lower interest rates on loans and lower fees for saving products.
How Does a Credit Union Work?
As you become a member of a credit union, you contribute to a communal pool of money which is used to help fund loans for other members, and any money charged for loans is used to create an income for the union. This enables money to be put back into the pool, and any savings that are not used in loans to members can be used to give further income to the credit union.
The credit union then uses this pool of money to pay for operational expenses and to fund the dividend that is paid on members’ shares. The credit union will adjust the services they can provide to their clients dependent on the money that the union has.
Why Should I Join a Credit Union?
Becoming part of a credit union has many benefits, including but not limited to:
Personalised Experience – Decisions are made by other owners, and so you have a direct influence on the people that make decisions about your finances.
Higher Interest Rates on Checking and Savings Accounts – They also offer lower interest rates on loans, ensuring you are only paying for the loan, rather than giving money to shareholders.
Low Fees – Transaction fees are not incurred to the same extent as there are no shareholders looking to make a profit.
What Are the Disadvantages of Credit Unions?
However, credit unions do have some disadvantages:
Accessibility – In order to open an account or take out a loan, you must be a member.
Lesser Level of Service – Credit unions are smaller in size and budget than banks.
Limited Locations – They are typically only found in the communities that are being served by the credit union.
How Can I Join a Credit Union?
Usually, credit unions have specific prerequisites that must be met before being able to become a member. This is usually sharing a common theme like working for a certain employer, living in a certain location, having a family member who is an existing member, or membership of a group.
However, you may still be able to join a credit union without meeting these requirements, but that will usually incur a small one-off fee.