What Is a Credit Union?

A man in a suit talks to a couple from across the table.

A credit union is a not-for-profit, member-owned financial institution that, like a bank, makes loans and offers checking and savings accounts. But unlike a bank, a credit union returns its profits to members. That means you'll generally find lower interest rates on loans and higher savings rates at credit unions, and a potentially friendlier banking experience.

How Are Credit Unions Different From Banks?

If banks are big chain restaurants, credit unions are local, family-owned cafes. You must meet certain criteria to be a member, and as a result, you'll get personalized service, a community-oriented mission and perks like financial education. Credit unions are different from banks in the following ways:

  • Credit unions require membership to join. You may qualify through your employer, religious institution, labor union or the geographic area you live in depending on the credit union. You may also join if you have a family member who meets one of the credit union's requirements. Some credit unions, like Alliant Credit Union and Connexus Credit Union, don't restrict their membership at all: Anyone can join by donating to a partner charity.
  • Credit unions return profits to members. Banks are for-profit institutions, which means their owners get a cut of the banks' interest and fee earnings. Since credit unions are owned by their members, the members themselves enjoy those profits in the form of lower-rate loans and higher-rate savings accounts. Members also elect representatives to each credit union's board of directors, so you'll have a say in how the credit union is governed and how it spends its money.
  • Credit unions may have fewer convenient branches. A credit union's mission is to serve the community where it's located, which means it may not have accessible physical locations elsewhere if you travel or move. But many credit unions have joined networks that offer fee-free ATMs and shared branches to credit union members across the country.

How Do You Join a Credit Union?

Search for a credit union in your area using the National Credit Union Administration's locator tool, or ask your employer, school or place of worship if it has an affiliated credit union.

When choosing a credit union, make sure it has the features that are most important to you. Perhaps you want access to a mobile app, a wide network of ATMs or no checking account minimums.

Once you've chosen a credit union, you'll confirm your eligibility and open an account with a small deposit. You may also pay a one-time membership fee. You can typically open an account either online or in person.

What Are the Advantages of a Credit Union?

The biggest advantage is the one that most affects your personal bottom line. If you've noticed that the money in your bank accounts isn't earning as much interest as you'd like, a credit union may be a better bet.

Here's an example: The national average savings rate at credit unions for a five-year certificate of deposit—a type of savings account that locks in your money for a specified period of time—was 2.35% in December 2018, according to an analysis by the National Credit Union Administration (NCUA). The average rate for the same account at banks was 1.89%. Credit unions may also offer lower rates on credit cards, mortgages, car loans and home equity loans.

Borrowers without good credit may be more likely to get a loan from a credit union than from a traditional bank. Credit unions are able to offer these benefits due to their not-for-profit status and their mission to invest in the local community. They have more flexibility to offer low rates and take on riskier borrowers partly because they don't pay income tax—though they do pay state and local property and payroll taxes.

What Are the Disadvantages of a Credit Union?

Credit unions may not offer innovative online or mobile banking features the way traditional banks do. That could make it harder to deposit a check on the go, for instance, or to find your closest surcharge-free ATM.

The availability of these features depends heavily on the credit union, though. Some have attracted members who prioritize the convenience of online banking by investing in technology. Check to see whether your chosen credit union has a mobile app and look up its user reviews on iTunes or Google Play.

If you prefer to visit physical bank branches, you'll likely have fewer options as a credit union member. But look into whether your credit union is a member of a larger network that you can turn to when you're outside the local community.

What Are the Different Types of Credit Unions?

Credit unions are either federally insured or privately insured. The NCUA regulates federally insured credit unions, and the National Credit Union Share Insurance Fund (NCUSIF) insures their deposits. That's similar to how the Federal Deposit Insurance Corporation backs bank deposits.

Some credit unions are state-chartered, as opposed to federal, and are privately insured. States oversee these credit unions and their deposits are not insured by the NCUSIF.

There's an easy way to tell if your credit union is federally insured. Its official name, which shows up on your statements and in legal documents, must include the phrase "Federal Credit Union."

What Are Employer Credit Unions?

Employer credit unions are available to those working in specific industries or at certain organizations or government agencies. Companies from brewer Anheuser-Busch to the grocery chain Publix have credit unions open to their employees. Other employer credit unions serve larger fields of membership.

You may have access to a credit union through work as a:

  • Government employee: Federal government employees can join the Pentagon Federal Credit Union, known as PenFed, or other credit unions—like the Treasury Department Federal Credit Union—depending on the agency they work for.
  • Member of the military: Both current and retired military service members can join the Navy Federal Credit Union; so can their family members. Other options include credit unions serving military bases, such as Andrews Federal Credit Union.
  • Teacher: Credit unions for teachers are available in several states and localities.
  • Member of a labor union: If you're a member of a union such as the AFL-CIO, for instance, you qualify for membership in its associated credit union.
  • Postal employee: The U.S. Postal Service has its own credit union, and postal employees can also join credit unions in their cities or counties.
  • Police officer or firefighter: There are multiple credit union options for police officers, firefighters and their families, generally in the localities where they work.
  • Transit employee: Transit systems including the Philadelphia-area Southeastern Pennsylvania Transportation Authority, known as SEPTA, and the Washington Metropolitan Area Transit Authority operate their own credit unions.

What Is a College Credit Union?

A college credit union restricts its membership to students, alumni, faculty, staff and their family members. The process to join is the same as for other credit unions. You'll become a member and part owner for life or for as long as you choose to maintain membership, not just while you're studying or working at the school. College credit unions may offer:

  • On-campus banking locations
  • Financial products geared toward students and those just starting out, including private student loans, student loan refinancing and first-time homebuyer programs
  • Scholarships for members
  • Financial education workshops

Do Credit Unions Report to Credit Bureaus?

Credit unions offer the same financial products banks do. That means applications for new lines of credit, and all loan or credit card payments made, will be reported to the credit bureaus. To maintain a good credit score, pay all your bills on time, including on any credit lines you've taken out from a credit union, and keep your balances low.

The Bottom Line

Credit unions generally provide a more cost-effective and personalized alternative to banks, if you're willing to trade some of the convenience and advanced technology traditional banks offer. They're an especially worthwhile option if banks won't work with you due to your credit score, or if you're looking for a deeper connection to your community.