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If you’re looking to switch banks or are in the market for a new mortgage, auto loan, savings account or other financial products, you may want to consider starting a banking relationship with an organization that isn’t a bank at all: a credit union.
Credit unions serve many of the same purposes and offer similar products as banks. But if you want to keep your money with a nonprofit organization that supports your community with special benefits and financial support, a credit union might be the right choice.
Take a closer look at what credit unions are, how they work and why these organizations can be such a special place for your personal finances.
What Is a Credit Union?
A credit union is a cooperative, nonprofit, member-owned financial institution. Unlike banks, which are owned by shareholders and must distribute profits to their owners, credit unions are owned by their members, who are also their customers. More than 122 million Americans are members of credit unions.
Credit unions offer many of the same types of financial products and services as banks. However, a credit union may use slightly different names for its accounts and features, such as “share draft account” instead of “checking account.” Because a credit union’s customers are member-owners, the credit union pays “dividends” instead of “interest.”
If you choose to keep your money with a federally insured credit union, you will also benefit from the credit union equivalent of FDIC insurance: the National Credit Union Administration (NCUA) provides federal insurance on up to $250,000 of qualifying deposits per depositor, per insured credit union, for each account ownership category, in the event of a credit union failure.
The bottom line is that credit unions are intended to serve as a safe place for people to save and borrow at reasonable rates. Because of their nonprofit status and community-oriented mission, credit unions can sometimes offer significant differences from banks and provide some surprising benefits to their members.
Advantages of Credit Unions
Credit unions have an overall mission of improving the financial well-being of their members and serving their communities. There are several important credit union benefits you can expect if you join a credit union.
Better Rates on Loans and Savings Accounts
Credit unions are focused on providing reasonable rates to their members. Because they don’t have to pay profits to shareholders as banks do, credit unions often can pass that money on to their members, by offering higher APYs on savings accounts and CDs and lower APRs on loans. Credit unions offer some of the best checking accounts, high-yield savings accounts, and CD rates.
Great Customer Service
Credit unions tend to rate more highly than banks on surveys of customer satisfaction. For example, Consumer Reports found that 96% of credit union members were “highly satisfied” with their credit union. Because a credit union’s customers are also its owners, these institutions tend to be highly focused on providing customer service in a way that not every bank may be inclined or able to match.
Credit for Small Businesses and Borrowers in Need
Credit unions tend to provide loans for the smallest businesses that might be overlooked or underserved by larger banks. If you are a small business owner or just want to support small businesses in your community, being a credit union member may help.
As nonprofit organizations, credit unions also have a focus on providing loans to people in need. Many credit unions offer emergency loans of up to $5,000, or short-term cash advance/payday alternative loans of up to $2,000. Instead of going to a payday lender, many people may get a better deal at a credit union.
Community Involvement
Nearly 50% of credit unions have a specific mission to serve low-income communities. No matter what kind of neighborhood, city or town people live in, credit unions intend to connect their local community with affordable financial services. Credit unions help their members save $12.6 billion per year by offering lower fees and higher returns on deposit accounts, as well as $5.6 billion of savings on auto loans.
Credit unions can make a big difference in the financial lives of people who might otherwise be charged high fees from check-cashing services, or pay higher interest rates on the car loans they need to get to work. Just by being present in their communities’ local banking markets, credit unions generate an annual $4.9 billion of economic benefits.
Support for Diversity and Inclusion
Perhaps because they are so community oriented, with local relationships in communities that might otherwise be underserved by traditional banks, credit unions have a strong focus on support for diversity and inclusion.
Compared to banks, credit unions have more than 10 times as many women serving as CEOs. Credit unions are also more likely than banks to be Minority Depository Institutions (MDIs); there are more than three times as many credit union MDIs as bank MDIs.
Many companies talk about how much they care about diversity and inclusion. Credit unions make it part of their everyday work by providing for the financial needs of diverse communities.
How to Join a Credit Union
Credit unions may have limits on who can qualify for membership. For example, some credit unions serve the military community, and you can only join if you are active-duty military, a veteran, certain other government employees or contractors, or their family members. Other credit unions may have a field of membership based on a particular employer, university, labor union or geographic area.
While some credit unions are limited to certain employers, types of workers or geographic areas, in general, quite a few credit unions are open to any members and will be happy to have you join. Some credit unions are digital-first and have a nationwide membership base. No matter where you live or work, you may be able to join a national credit union and get access to their rates on loans, CDs and savings accounts.
As part of the process of joining a credit union, you may need to pay a fee or make a donation, typically in the range of $5 to $25, which is the cost of purchasing one share of ownership in the credit union cooperative. You can join a credit union by going to a branch in person or opening a new account online.
Credit Unions vs. Banks
After seeing the advantages of a credit union, you might wonder why anyone would choose to put their money in a bank. It’s true that credit unions have some valuable benefits and attractive offerings. There are complex reasons why people choose their banking relationship. Some banks may offer a complete range of financial products, more desirable mobile banking app features, easier international banking or better digital banking tools.
Depending on what you need from your banking relationship and day-to-day financial management, keeping your money at a credit union may help you save on fees, get a higher yield on your savings, receive a better rate on a loan and improve your financial well-being—all while supporting an organization that makes special contributions to the economic empowerment of your community.
If all of that sounds like a good deal, then a credit union may be right for you.
Frequently Asked Questions (FAQs)
What is a share draft account?
A share draft account is a credit union checking account. It works similarly to a bank checking account, but you may be more likely, as a credit union member, to earn dividends (that is, interest) with a share draft account than with a bank checking account.
How much financial benefit do members receive as part of their credit union membership?
According to the June 2021 Membership Benefits Report from CUNA (Credit Union National Association), the direct annual financial benefits of credit union membership amounted to $109 per single member or $229 per member household. The more you use your credit union for additional products and services, the more benefits you are likely to enjoy.
For example, the report also found that by getting an auto loan from a credit union for a $25,000 new automobile for 60 months, members would save an average of $199 per year in interest, or approximately $1,000 in savings over five years, compared to a typical bank auto loan.
What are some other examples of how credit unions support their communities?
Credit unions provide community involvement and financial support in several major ways beyond their day-to-day operations, such as providing financial education, small business loans and home loans to lower-income borrowers. For example, more than half of credit union home loans go to people who earn middle incomes or lower.
