Loan Basics

What Is a Credit Union?

A credit union is like a bank but with major differences. Like banks, credit unions accept deposits, make loans and offer varying financial services like offering credit and debit cards. But credit unions are owned by their members and operate as nonprofit organizations: any profits made by a credit union are returned through reduced fees, lower loan rates, and higher savings rates.

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

Another key difference between a bank and a credit union is that credit unions are smaller than most banks, and can serve a particular region, industry or group. For example, Chase bank has over 5,100 branches and 16,000 ATMs across the country, while the Navy Federal Credit Union (NFCU)—the largest credit union in the U.S. based on assets—has around 300 branches, mostly near military bases.

But Navy Federal Credit Union members have access to over 52,000 ATMs nationwide, a lot more than the larger banks provide. Many credit unions are part of co-op ATM networks that allow them to reach more people.

A credit union further differs from a bank because a financial co-operative can range in size from small, volunteer-only businesses to large entities with thousands of participants. Credit unions can be formed by large corporations, organizations and other entities for their employees and members. Credit institutions are created, owned and operated by their participants.

The biggest difference between credit unions and banks is that banks are for-profit businesses with a goal of returning value to their shareholders. Credit unions function as not-for-profit businesses with a goal of returning profits back to members, which are its owners.

The basic business model of a credit union is members pool their money—they are buying shares in the cooperative—to offer loans, deposit accounts, and other financial products and services. Any income generated can fund projects and services that will benefit the interests of its members, including:

  • Lower fees
  • Lower account minimums
  • Higher rates on savings
  • Lower borrowing rates

How do you join a credit union?

To join a credit union you must open an account there. Once you do that you become a member and part owner of that credit union. As a member of a credit union, you can take part in the credit union business decisions, including voting on who sits on the board of directions. Each member receives an equal vote no matter how much money they have in their account.

Historically, becoming a member of a credit union was limited to people who have a "bond," typically defined as:

  • Working in the same industry
  • Working for the same company
  • Living in the same community

Credit unions have now relaxed the limits on membership, allowing the public to join. Today, credit unions have become commonplace with more than 5,600 federal credit unions in the U.S. with assets of $1.35 trillion in the second quarter of 2017.

What are advantages of credit unions?

Here are four advantages that a credit union has over a bank:

  1. Thanks to its nonprofit status, a credit union is exempt from paying corporate income tax on earnings.
  2. Credit unions just need to produce enough profit to finance day-by-day operations; therefore, they need smaller operating margins than banks. This permits credit unions to pay higher interest rates on savings and charge lower fees on checking accounts, for example.
  3. Credit unions offer higher rates for CDs or money market funds compared to banks. The differences may be small but over time it will add up.
  4. Credit unions can also offer lower rates for credit cards, auto loans, mortgages and home equity loans from their non-for-profit status.

What are disadvantages of credit unions?

Here are four disadvantages that credit unions—and their members—can suffer from:

  1. Fewer physical locations than many larger banks
  2. Less choice for credit card options than banks
  3. Limited revenue can sometimes limit the availability of technology such as banking apps, mobile deposits or bill payments, and cash transfers.
  4. Shorter hours open than banks

What are the types of credit unions?

There are four main types of credit unions:

  • Federal credit unions, which operate under federal financial regulations rather than state banking laws.
  • Employer credit unions, which are sponsored by employers for their employees.
  • Local credit unions, which serve people that live in a certain area.
  • Group credit unions, including schools, labor unions, places of worship, or even a homeowners association.

All federal credit unions are regulated by the NCUA and insured by the National Credit Union Share Insurance Fund (NCUSIF). The NCUSIF also covers federally insured state credit unions. There are credit unions that are outside of all these categories, like state-chartered credit unions that are privately insured. These private insurers still cover deposits made and are backed by the credit of the U.S. government.

Different credit unions, known as Federal Credit Unions (FCU), operate under federal financial regulations rather than state banking laws. Another set of credit unions are known as State Employees Credit Unions that are owned by citizens of a state.

The NCUA further breaks down credit unions membership by field-type across these categories:

  • Community credit unions
  • Associational credit unions, like faith-based or fraternal groups
  • Educational credit unions
  • Military credit unions
  • Federal, state and local government credit unions
  • Manufacturing industry credit unions for industries like chemicals and machinery
  • Service industry credit unions for industries like finance, healthcare, and transportation
  • Corporate credit unions
  • Multiple bond credit unions
  • Non-federal credit unions
  • Employer credit unions

What are employer credit unions?

Credit unions sponsored by employers are for their employees to join and represent workers from a range of fields, including:

  • Government employees/li>
  • Military
  • Teachers
  • Fireman
  • Postal employees
  • Police officers
  • Transit employees

What is a college credit union?

A college credit union acts just like any other credit union. If you are a college student, your university or college could have a credit union that is open to students, faculty, alumni, and sometimes nearby residents. A college credit union can provide additional benefits that matter to students including:

  • On-campus location
  • Free banking
  • College scholarship offers
  • Private student loan rates
  • Student loan refinancing
  • Free financial education support
  • Meal-program integration
  • Student-section football tickets dues paid

Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer, or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
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